Document o f The World Bank

FOR OFFICIAL USE ONLY Report No: 5 1304-BR

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED ADAPTABLE PROGRAM LEADING (LOAN)

IN THE AMOUNT OF US$44 MILLION

TO THE

MUNICIPALITY OF SANTOS

WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL

FOR THE

MUNICIPALITY OF SANTOS PROJECT: SANTOS NOVOS TEMPOS

(PROGRAM DE DESENVOLVIMENTO ESTRATEGICO DE SANTOS E INFRAESTRUTURA URBANA E HABITACIONAL DA ZONA NOROESTE E DOS MORROS - “PROGRAM

SANTOS NOVOS TEMPOS’Y - PHASE V (APL 5)

IN SUPPORT OF THE FIFTH PHASE

OF THE

BRAZIL MUNICIPAL LENDING PROGRAM

October 29,2009

Sustainable Development Department Brazil Country Management Unit Latin American and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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AGEM

BNDES

BSMR

CAD CDHU

CODESP COHAB ESP IBAMA

IBAN

PAC PRODESAN

SEAS SEBRAE

SEOSP

SEFM

SG SEPIPR UGP

CURRENCY EQUIVALENTS

(Exchange Rate Effective December 1,2008)

Currency Unit = Real R$1.00 = US$0.45 R$2.22 = US$l.OO

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS Baixada Santista Metropolitan Agency National Bank o f Social Development Baixada Santista Metropolitan Region Port Administration Council State Housing Company

Santos Port Authority Municipal Housing Department State of Sao Paulo Federal Environmental Agency

Brazilian Institute o f Municipal Administration Growth Acceleration Program Santos Informational Technology Department Social Assistance Secretariat Support to Small and Medium Enterprises Civil Works Department o f Sao Paulo Municipal Secretariat of Economy and Finance Santos Secretariat of Government Federal Port Secretariat Project Coordination Unit

Agencia Metropolitana da Baixada Santista

Banco Nacional de Desenvolvimento Social

Conselho de Administraqiio Portuaria Companhia de Desenvolvimento Habitacional e Urbano do Estado de STio Paulo Autoridade Portudria do Port0 de Santos Companhia Metropolitana de Habitaqiio Estado de Siio Paulo Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renovaveis Instituto Brasi teiro de Administraqiio Municipal

Programa de Aceleraqiio do Crescimento Progress0 e Desenvolvimento de Santos

Secretaria de Assistencia Social Agbncia de Apoio ao Empreendedor e Pequeno Empreshrio Secretaria de Obras de Siio Paulo

Secretaria de Finanqas

Secretaria de Govern0 de Santos Secretaria de Portos da Presidbncia da Republica Unidade de Gerenciamento do Programa

Vice President: Pamela Cox Country Director: Makhtar Diop

Sector Director Laura Tuck Sector Manager: Guang Zhe Chen

Task Team Leader: Paula Dias Pini

FOR OFFICIAL USE ONLY

BRAZIL Municipality of Santos Project

CONTENTS Page

STRATEGIC CONTEXT AND RATIONALE .................................................................. 1 Country and sector issues .................................................................................................... 1

Rationale for Bank Involvement .......................................................................................... 6 Higher level objectives to which the project contributes .................................................... 7

I1 . PROJECT DESCRIPTION .................................................................................................. 8

I . A . B . C .

A . B . C . D . E . F .

I11 . A . B . C . D . E . F .

I V . A . B . C . D . E . F . G .

Lending instrument .............................................................................................................. 8

Program objective and phases ............................................................................................. 8

Project development objective and key indicators .............................................................. 9

Project components .............................................................................................................. 9

Lessons learned and reflected in the project design .......................................................... 12

Alternatives considered and reasons for rejection ............................................................. 13

IMPLEMENTATION ..................................................................................................... 13 Partnership arrangements (if applicable) ........................................................................... 13

Institutional and implementation arrangements ................................................................ 13

Monitoring and evaluation o f outcomes/results ............................................................... -14

Sustainability ..................................................................................................................... 14

Critical risks and possible controversial aspects ............................................................... 14

Loan conditions and covenants .......................................................................................... 15

APPRAISAL SUMMARY .............................................................................................. 16 Economic and Financial analysis ...................................................................................... 16

Technical ........................................................................................................................... 18

Fiduciary ............................................................................................................................ 18

Social ................................................................................................................................. 19

Environment ...................................................................................................................... 20

Safeguard policies .............................................................................................................. 21

Policy Exceptions and Readiness ...................................................................................... 22

. .

Annex 1: Country and Sector o r Program Background .......................................................... 23

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies .................. 29

Annex 3: Results Framework and Monitoring ......................................................................... 30

Annex 4: Detailed Project Description ...................................................................................... 35

Annex 5: Project Costs ................................................................................................................ 41

Annex 6: Implementation Arrangements .................................................................................. 42

Annex 7: Financial Management and Disbursement Arrangements ..................................... 44

Annex 8: Procurement Arrangements ....................................................................................... 52

Annex 9: Economic and Financial Analysis .............................................................................. 56

Annex 10: Safeguards Policy Issues ........................................................................................... 63

Annex 11: Project Preparation and Supervision ...................................................................... 73

Annex 12: Documents in the Project File .................................................................................. 74

Annex 13: Statement of Loans and Credits ............................................................................... 75

Annex 14: Country at a Glance .................................................................................................. 79

Annex 15: Map (IBRD 37337) .................................................................................................... 82

BRAZIL

Source Borrower International Bank for Reconstruction and

MUNICIPALITY OF SANTOS PROJECT: SANTOS NOVOS TEMPOS

Local Foreign Total 44.00 0.00 44.00 44.00 0.00 44.00

PROJECT APPRAISAL DOCUMENT

Development Total:

LAT IN AMERICA AND CARIBBEAN

88.00 0.00 88.00

LCSUW

Date: October 29, 2009 Country Director: Makhtar Diop Sector ManagedDirector: Guang Zhe Chen

Team Leader: Paula Dias Pini Sectors: General water, sanitation and flood protection sector (50%);Sub-national government administration (50%) Themes: Access to urban services and housing (P); Municipal governance and institution building (P) Environmental screening category: Full Assessment

Project Financing Data

Project ID: P104995

Lending Instrument: Adaptable Program Loan

[XI Loan [ ] Credit [ 3 Grant [ ] Guarantee [ ] Other:

Borrower: Municipality o f Santos

Responsible Agency: Government Secretariat, Municipality o f Santos 30 Praca Visconde de Maua Santos Sao Paulo Brazil Tel: (55-13) 3201-51 11 lara-sgo@santos,sp.gov.br - +

Estimated disbursements (Bank FY/US$m) :Y I 10 I 11 I 12 I 13 I 14 I 4nnual hmulative

1.00 8.00 12.00 12.00 11.00 1.00 9.00 21.00 33.00 44.00

Expected effectiveness date: April 16, 20 10 Expected closing date: June 30 ,2015 Does the project depart from the CAS in content or other significant respects? Ref: PAD I.C. Does the project require any exceptions from Bank policies? Ref: PAD IKG.

I s approval for any policy exception sought from the Board? Does the project include any critical risks rated “substantial” or “high”? Ref: PAD III. E. Does the project meet the Regional criteria for readiness for implementation? Ref: PAD I K G. Project development objective Ref: PAD II. C, Technical Annex 3 The objective o f the project i s to enhance the Borrower’s capacity in local economic development and to improve public services in the Northwest Zone o f the Municipality o f Santos.

[]Yes [XINO

[ ]Yes [XINO

[ ]Yes [XINO

[ ]Yes [XINO

[X]Yes [ ] N o

Have these been approved by Bank management? [ ]Yes [IN0

Project description RefPAD II.D, Technical Annex 4

Component 1: Municipal Management Enhancement (US$9 million) This component aims to strengthen the technical capacity o f the Municipality o f Santos in local economic development. I t includes two subcomponents that wi l l benefit all city residents. Cost includes physical and cost contingencies.

Component 2: Revitalization of the Northwest Zone of Santos and Adjacent Hillside (US$79 million) This component focuses on an integrated package o f physical and social investments related to urban environmental improvements in the Northwest Zone o f Santos, with direct benefits to the 90,000 residents o f the Northwest Zone, including about 2,400 households that wi l l benefit from better living conditions through urban upgrading and resettlement. This component includes two subcomponents. Cost includes physical and cost contingencies.

Which safeguard policies are triggered, if any? Ref: PAD I K F, Technical Annex 10

Management); OP 4.1 1 (Physical Cultural Resources); OP 4.12 (Involuntary Resettlement); OP OP 4.01 (Environmental Assessment); OP 4.04 (Natural Habitats); OP 4.09 (Pest

4.36 (Forests); OP 4.37 (Safety o f Dams). Significant, non-standard conditions, if any, for: RefPAD III. F Board Presentation: None Loadcredit effectiveness: An additional legal opinion i s required confirming that the Loan has been registered by the Guarantor’s Central Bank. This i s standard for all Loans in Brazil.

I Covenants applicable to project implementation:

(i) Maintain, throughout the project implementation, a UGP with powers and responsibilities set forth in the Operational Manual, and not later than six months from the Effective Date, have the UGP fully staffed with personnel with experience and qualifications satisfactory to the Bank. (ii) Prior to initiating the bidding process for any works under Component 2,2.1, enter into an agreement with COHAB under terms and conditions satisfactory to the Bank. (iii) Carry out the project in accordance with the Operational Manual. (iv) Carry out the Resettlement Plan in accordance with i t s terms; undertake the activities o f the EMP; and furnish to the Bank any needed documentation as required by the EMP. (v) Ensure that the terms o f reference for any studies to be carried out under Parts 1.1 (a) and (b) o f the Project shall be satisfactory to the Bank and, to that end, such terms o f reference shall incorporate the requirements o f the Bank safeguard policies as applied to the advice conveyed and conclusions reached through such studies.

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. The Municipality o f Santos has solid economic and social development indicators. With a population o f 420,000, i t distinguishes itself from the other 645 municipalities in the State o f SZo Paulo (ESP) because: (a) it hosts the largest port in Latin America, the Port o f Santos'; (b) it has major political and economic influence in the ESP and especially in the Baixada Santista; (c) i t s geographic proximity to SZo Paulo has resulted in strong economic ties to the SZo Paulo metropolitan region; and (d) it has the third-best Municipal Human Development Index (MHDI)2 in the state, the fourth best in the Southeast region, and the fifth best in the country. Nationally and in the region, Santos i s also wel l ranked in terms o f fiscal managements3 Since 2002, Santos has maintained a budgetary surplus, with debt exposure well below the law o f fiscal responsibility.

2. The economic base o f the city i s diversifying. While in the past the logistics sector was by far the main economic force in the city, Santos i s experiencing rapid economic growth and development driven by a variety o f economic factors. In addition to 20% year-on-year growth in port transactions and substantial public and private investments in port expansion, other sectors such as energy, tourism, research and technology, and real estate have gained a strong influence in the city's development.

3. Santos i s at the center o f economic growth in the Baixada Santista Metropolitan Region. Santos plays a prominent economic role in the metropolitan region and i s also characterized by unique natural resources, including i t s beaches. These attractions have transformed the city into one o f the most popular tourism centers in the ESP, especially for the 19 mi l l ion people living in the SBo Paulo metropolitan area, located about one hour away by car. Approximately 30% o f the population and 50% o f the jobs offered in the metropolitan region are located in Sarhos. About 75% o f the city benefits from high urban and environmental standards, good public and private services, and high levels o f private investments. The eight universities established in the city have been the third-largest drivers o f j o b creation in the economy. Public

' Santos i s currently the port with the largest container movement in the LAC region (2.85 million TEUS in 2066). To a large extent, the freight flow passing through the port complex has its origin or destination in the S8o Paulo metropolitan region, in the local industrial basin (petrochemical plants, steel mills) and in the agricultural areas in south-central and southwestern Brazil (particularly soybeans from the Mato Grosso region).

The Human Development Index (HDI) i s a comparative measure o f l i f e expectancy, literacy, education, and standard o f living for countries worldwide. I t i s a standard means o f measuring well-being and also the impact o f economic policies on quality of l ife. The index was developed in 1990 and has been used since 1993 by the United Nations Development Program in its Human Development ReDort. In Brazil, the federal Institufo de Pesquisa EconBmica Aplicada (IPEA), associated with similar state institutions (in S8o Paulo, FundaGSio SEADE), has applied this methodology for municipalities, creating the MHDI. The National Census carried out every ten years provides the data for calculating the HDI and MHDI.

Municipal per capita tax revenue i s among the highest in the Southeast region and i ts tax revenue composition, about 50% o f which corresponds to local taxes, puts Santos into a select group of municipalities that has achieved high tax collection levels and a well-balanced tax revenue profile. Santos expects to collect about US$800 million in tax revenue by the end o f 2008, corresponding to a per capita revenue o f about RS$2,300.00, while the average in the southeastern region i s approximately RS$1,300.00 (data from the Brazilian National Treasury-STN and IBAM, a municipal research institute).

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safety i s highly rated as a result o f intense social assistance programs and a network of video surveillance cameras, linked with prompt police response mechanisms.

4. Yet, despite these positive indicators, Santos faces significant challenges to fully realize its development potential and to address extreme poverty in its territory. Among these challenges are:

a) Land Scarcity and Urban Expansion: Although Santos has a large territory (271 km2) as compared to the region’s other municipalities, only about 10% o f the total territory i s available for urban use. The remaining 90% i s composed o f a mangrove and the Atlantic Forest Mountains, conservation areas where development i s not permitted. In addition, Santos’ territory i s split into two parts: an island and the continental area. The 10% o f land available in Santos for urban use i s located on the island, which i s shared with the Municipality o f Siio Vicente. Nearly 100% o f the population lives exclusively on the island, and as a result, population density and land values are high. Urban development on the island was largely facilitated by a robust macro-drainage system built about 100 years ago, which controlled flooding and eliminated yellow fever and malaria surges that were placing the city and the port’s existence at risk. This drainage system i s in good working condition in the Southeast part o f the city, but i s highly inadequate in the Northwest Zone which i s the only part o f town with current potential for urban expansion. The Northwest Zone, with approximately 8 1,000 inhabitants, i s located between the hills and mangrove areas, and i s farthest removed from the open beach area. Unfortunately, slums have expanded over the mangroves and the area faces critical social and environmental challenges. Exacerbating the situation, insufficient investments in infrastructure have led to frequent flooding.

b) Inter-governmental Coordination: As in many other metropolitan areas, Santos suffers from insufficient inter-governmental coordination among the federal, state, and municipal governments. All levels have a strong interest and presence in the region, and the current lack o f coordination in terms o f investment and infrastructure i s an obstacle to development. The federal government controls important stretches o f land in the region due to regulations affecting the coastal and mangrove areas, as well as residual land holdings remaining under federal ownership after the privatization o f the Federal Railway System in the 1990s. Making these latter areas available for public or private investment would greatly facilitate development in the region. The federal government owns the port o f Santos, including the land and infrastructure needed to access the port. The state government i s the primary entity responsible for environmental policies and regulations (including their enforcement), and therefore controls land use in nearly 80% o f the region’s territory. The state i s also responsible for coordination in metropolitan areas. The municipalities are responsible for land use policies, planning, and enforcement. However, in practice the federal and state governments have control over more than 80% o f the territory. Most o f the widespread informal settlements in the region have developed on federally or state-regulated areas. This intergovernmental presence creates an extremely complex institutional and legal framework in the Baixada, with conflicting and overlapping responsibilities. Although the region is extremely attractive to investment of all types, the difficulties with land regulation and environmental licenses have the

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potential to discourage investments from both the private and public sectors. In fact, i t i s said that an environmental license i s the most prized and difficult document to obtain in the region.

c) Land Use Conflicts: Land use conflicts associated with urban and environmental uses in the Baixada have a major impact on public and private investment in the region. Given the extent o f environmentally protected areas, the economic attractiveness o f the urban areas, the limited availability o f urban land, and unclear regulation on the boundaries between urban and environmental areas, conflicts arise with almost any type o f investment.

d) Downtown and Northwest Zone Disinvestment: The development o f Santos’ downtown area and the port area were closely connected until the 1950s. The economic downturn worsened in the 1990s when the port’s modernization resulted in massive layoffs o f some 14,000 unskilled port workers, most o f which lived in the Northwest Zone. The downtown historic district experienced severe deterioration, as did the Northwest Zone, both being heavily dependent on port activities. Today, several buildings o f notable cultural interest have been restored through a broad, ongoing municipal fiscal incentive program. Noticeable results have been achieved but significant efforts are s t i l l needed, such as integrating the historic district with emerging new port activities. ,Relevant public investments to address the social and urban needs in the Northwest Zone have also been initiated. Although private investments in urban development are abundant on the rest o f the island, they are s t i l l scarce in the Northwest Zone.

e) Transportation: Metropolitan transportation i s a complex, costly, and technical challenge in the Baixada, but i s key to address land scarcity and improve living conditions in Santos and to promote sustainable and integrated regional development. The regional geography makes mobility a complex challenge in the Baixada due to the abundance o f water bodies, mangroves, and hills. Improvements to the region’s transportation system would bring about better population distribution across the municipalities and reduce pressure on urban development in Santos. I t would also enable lower-cost housing solutions in the neighboring municipalities given the comparatively high land value in Santos. The Municipality o f Santos i s currently pushing forward solutions to the metropolitan transportation problem through a joint initiative with the state government and the private sector.

Local Economic Development

5. The Municipality o f Santos has developed a strategic vision for promoting i t s development opportunities and addressing obstacles to development. I t includes a comprehensive plan to maximize the benefits that the city can gain from regional economic development, in addition to addressing some important obstacles that hinder regional development. The city’s strategic vision includes the transformation o f the Port o f Santos from a “channel o f goods” into a broader, inter-related cluster o f economic activities with a strong link to Santos and neighboring cities. Within this cluster o f activities would be a vibrant waterfront with a special

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port for cruise ships, hotels for tourists and business people, commercial offices, restaurants, a convention center, a port for passengers coming and going from Guaruja to Santos, and waterfront recreational activities.

6. Inter-governmental coordination i s needed to overcome a number of constraints to economic development within the region. The most prominent o f these are the existing overlaps between urban and environmental regulations. In order to promote regional economic development and increase attractiveness for private sector development, the municipal government plans to carry out a strategic environmental study (SES) encompassing the region. This study would be developed in a participatory manner along with other stakeholders in the region, and would aim to: (i) reduce the level o f effort and time required for preparing environmental impact assessments (EIA)4 for future specific investments, and (ii) increase consistency and synergies among future EIAs and respective environmental management plans. The municipality wi l l invest technical expertise and financial resources to better integrate urban and environmental regulations, while also improving the focus o f environmental mitigation investments in order to maximize their impact. This improved integration would include more efficient technical, institutional, and processing arrangements involving the three governmental levels.

7. A city-port initiative and downtown historic center renewal would spur local economic development. In February 2008, the Federal Secretariat o f Ports (CODESP) and the Municipal Government o f Santos signed a land revitalization agreement to transfer specific port areas no longer utilized for port operations to the municipality. The objective o f this four-year agreement i s to carry out the joint preparation and implementation o f a plan for the rehabilitation o f the port area situated close to the Valongo train tati ion,^ and i ts integration with the local economy and other revitalization programs already in place, especially in the historic center. The municipal government must develop the full set o f studies for the unused port area (a narrow 1- km strip) and has requested technical assistance from the Bank and a specialized consultancy for i t s preparation. These studies will be jointly reviewed by a committee constituted by the municipality, CODESP, and the National Ports Secretariat. A public-private partnership (PPP) arrangement for investment and management i s envisaged. The agreement opens a window o f opportunity for the local government to participate in port development issues and serve as a pilot for further development.

8. The municipality also plans to stimulate the local economy and attract private sector investment by improving information technology infrastructure. Today, one third o f the city has already been provided with state-of-the-art fiber optic networks supporting the “e- government program,” which provides an efficient and broad array o f services to the population while also increasing government transparency and accountability. These networks also support the surveillance camera system, which has significantly improved the city’s safety. This

Practically all investments in the region require submitting to IBAMA and/or the State Environmental Agency an Environmental Impact Assessment (EIA) and an Environmental Assessment Report (RIMA) for the purpose of requesting the three required environmental licenses. The licenses are required even to develop the engineering designs.

Valongo i s the first railway station in Brazil, currently dismantled and purchased by the Santos Municipal Government.

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improvement i s critical to the ongoing modernization in the municipal administration as well as for many other businesses that wi l l need to be sustained by an extensive information technology network. The ultimate objective i s to further increase the city’s competitiveness by providing a high-end information technology system. The state government i s also involved in supporting the creation o f a technology park, which wil l be located downtown as part o f the revitalization program. Envisaging the completion o f the system, the municipal government wants to develop a partnership with the private sector in order to ensure long-term financial sustainability for these services. This effort i s integrated with the ongoing productive cluster development initiatives in Santos. In the energy, port, and industrial sectors, these initiatives are led mainly by Petrobras and FIESP. The municipality has focused on the information technology cluster because it i s a cross-cutting activity among economic sectors that would benefit from public leadership.

Poverty Alleviation

9. Significant investments in the Northwest Zone are needed to address poverty in the city. The municipality has undertaken numerous initiatives to address poverty in Santos. With i t s own municipal budget, i t has financed special education, health services, job training, and social development programs. However, in order to substantially reduce poverty in the region, significant investments in housing and urban services are also needed. The municipality wi l l receive an integrated package o f investments from both the PAC program6 and the Bank- supported project to address these complex poverty issues. Through this program, the living conditions o f families living in the Northwest Zone, including slums, wi l l be improved through a comprehensive two-pronged approach involving: (i) flood control through the expansion and rehabilitation o f the macro-drainage system, and (ii) a comprehensive slum-upgrading program to improve the quality o f l i fe for the inhabitants in the Northwest Zone. The overarching goal o f this initiative i s the urban upgrading o f the area through intensive social programs, including job training opportunities, basic services, and environmental and urban services.

10. In addition to alleviating poverty and improving the quality o f l i f e in the Northwest section o f the city, other positive externalities o f the infrastructure improvement wi l l be (i) the augmentation o f land available for improved urban development, which i s a major obstacle to local economic development, and (ii) better quality o f l i f e and economic opportunities for the city as a whole since the more significant flood events in the Northwest Zone also impact streets that are fundamental for the movement o f people and goods in and out o f the city.

Bahada Santista Development Framework

1 1. The Santos Municipality Project complements the Baixada Santista’s development initiative. According to a study by SEADE (FundaC6o Sistema Estadual de Andise de dado^)^ the region has several economic drivers: logistics, tourism, energy, urban development, research and development, environment, and port-industries. However, i t also faces several constraints to

The government introduced the PAC (Growth Acceleration Program) in January 2007 with a goal o f encouraging R$ 504 billion in public and private investment over the next four years. The measures are divided into five groups: infrastructure (transport, sanitation and housing), credit stimulation, institutional development, tax exemption, and long-term fiscal measures.

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SEADE i s a State o f SILO Paulo Government entity responsible for analytical and statistical studies. 7

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development, notably: inter-institutional coordination, land use and environmental regulation, and logistics. To build on the Baixada Santista’s strengths and to tackle i t s problems, a strategic agenda was developed with a focus on: (i) strengthening inter-governmental coordination to maximize outcomes and reduce negative externalities through developing and information system to facilitate business development, a strategic medium-long term plan to identify local economic opportunities, a port management model, a metropolitan management model, and a shared management model; and (ii) promoting a region-wide environmental vision by developing a strategic environmental study (SES), an environmental management and urban renovation plan, and a land use policy to promote a zone o f sustainable development.

12. Projects totaling US$30 billion, run by federal, state, municipal, and private authorities, are currently being considered or already under implementation, including: (i) logistics projects focusing on port infrastructure; (ii) tourism projects to boost the level o f visitors; (iii) enerw projects, including plans by Petrobras to invest in offshore gas exploration and pipelines; (iv) urban development focusing on slum upgrading and water and sanitation programs; (v) research and development to improve technical ski l ls among local workers; (vi) environmental projects focusing on sustainable development; and (vii) port-industw projects to expand investment and industrial development. With i t s focus on urban management, slum upgrading, and environmental sustainability, the Santos Municipality Project wi l l facilitate and contribute to the Baixada Santista’s strategic agenda.

B. Rationale for Bank Involvement

13. The Bank has a clear strategy for Brazilian cities. The Brazil Municipal Lending Program (BMLP) i s a broad strategy in which, through a selective and strategic program o f support to cities, the Bank can provide assistance by demonstrating how policies, effectively implemented at the local level, can improve the lives o f the urban poor, promote sound local governance, and lead to a more competitive local economy. The Municipality o f Santos i s a strong candidate for this type o f World Bank intervention, and has been identified as one o f the APL projects in the umbrella PAD. Along with other municipalities in the Baixada Santista, Santos plays an important role in the national economy.

14. The Bank can provide extensive global experience in support o f improved municipal management practices. The Bank can tap into i ts extensive knowledge and experiences in Brazil and around the world to provide assistance to Santos in addressing i t s key development challenges, including: (i) linkage with port development; (ii) enhancing economic development strategies; (iii) improving the drainage system; (iv) strengthening coordination with the various government and nongovernment entities in the municipality; (v) improving coordination among multiple levels o f government; and (vi) improving the quality o f l i f e for the urban poor. The Bank i s also in a position to capitalize on i ts role as a global knowledge broker by facilitating comparative learning and exchanges among a significant portfolio o f urban and environmental projects with municipalities in Brazil. Moreover, the Bank can play a key role in supporting intergovernmental coordination by reinforcing vertical coordination in two ways: (i) provide meaningful information to help the discussion on needed coordination; and (ii) bring together all the involved actors (convening power).

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15. Relationship wi th CPS (2008-2011): Under the CPS, the Bank Group engagement with cities will focus on improving city management, city competitiveness and on introducing results- oriented mechanisms for providing urban services. It i s also foreseen that there will be a focus on those cities that are central to broader economic growth (such as port cities like Santos). The proposed project f i t s within the CPS framework because it: (i) recognizes that investment in growth-supporting infrastructure is a critical constraint to growth in Santos; (ii) includes a focus on equity and environmental sustainability; (iii) will tackle a paradigmatic challenge related to environmental licensing and i t s relationship to local economic development; and (iv) focus on a city that i s o f great important to economic growth within the Baixada region and the country.

16. Municipal Strategy: The project also f i t s within the four pillars set forth by the Bank for i t s support to municipal development in Brazil: Addressing Competitiveness in Suntos requires measures to facilitate public and private investments, especially in addressing institutional constraints with regard to overlapping territorial mandates and land use conflicts caused by competing municipal, state, and federal interests. Addressing Creditworthiness in Suntos requires efforts to further the fiscal modernization process in order to complement the modernization program financed by the Banco Nacional de Desenvolvirnento Social (BNDES). Addressing Services Delivery in Suntos requires priority for macro-drainage infrastructure and services, especially in the poorer neighborhoods o f Santos. Ensuring Cities us Partners i s central to the continued growth o f Santos, the BSMR, and its contribution to the national economy.

17. Santos’ Strategy: The proposed Santos Municipality Project i s part o f the municipality’s strategic vision for promoting the city’s development opportunities and addressing obstacles to growth. The municipality places partnership with the World Bank among the strategic initiatives that have strengthened i t s leading role in the region, and it has sought partnership with the World Bank for this purpose. This strategic vision has emerged from multiple studies already prepared for the region by either the public or the private sector. The municipality i s pursuing integrated lines o f development in multiple sectors, notably in tourism, research and development, urban development, information technology, and port- and industrial-related activities. Many activities related to these lines o f development are already under execution, some have been concluded, and others are being designed.’ The Bank has provided inputs to the regional development discussions since i t s early involvement in the Baixada. With this partnership, the municipal government plans to further leverage i t s leading role in the region.

C. Higher level objectives to which the project contributes

18. The Santos Project supports the vision for a more equitable, sustainable and competitive Brazil outlined in the Government’s Multi-Year Plan (PPA). By addressing constraints to growth, social challenges, and environmental vulnerabilities, the Project i s also representative o f broad challenges facing urban municipalities in Brazil. The 2008-201 1 CPS builds on the PPA

* Examples include solutions for metropolitan transportation, which are at an advanced stage, through a joint initiative between the state government and private funds. Additionally, the city has several local economic development initiatives underway, including Programa Alegro Centro focused on downtown revitalization, PRO-URBE focused on historic rehabilitation, and a planned business/technology center

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and identifies infrastructure as a critical constraint to growth. Moreover, it defines a focus on city competitiveness (local economic development) and cities that are central to broader economic growth - two fundamental aspects o f the Santos Project.

APL: Borrower

11. PROJECT DESCRIPTION

IBRD Borrower Total US$m US$m US$m

A. Lending instrument

Loan 1 : Municipality o f Uberaba Loan 2: Municipality o f Recife

19. The Santos Novos Tempos Project i s part o f the Brazil Municipal Lending Program Umbrella APL. The Bank would enter into an individual investment loan agreement with the municipality to finance investments in integrated urban infrastructure and environmental management, governance, basic services and urban upgrading, consistent with the overriding development objective. The APL lending program i s detailed in the Umbrella Program Document (Report No. 323 15-BR).

17.3 11.7 _. . -

32.8 14.2 47.0 I

B.

20.

e

e

21.

Loan 4: Municipality o f SBo Luis Loan 5: Municipality o f Cubatgo (dropped) Loan 6: Municipality o f Santos Loan 7: Municipality o f Belo Horizonte (dropped) Loan 8: Municipality o f Guaruja (dropped) Total Program

Program objective and phases

35.6 23.8 59.4 14.6 14.4 29.0 40.1 40.1 88.0 34.1 22.7 56.8 30.4 30.4 60.8

236.0 170.6 406.6

The objectives o f the Brazil Municipal Lending Program are:

To include tangible improvements in the participating municipalities, including: (i) better living conditions for municipal residents generally and low-income communities particularly, (ii) improved capacity for service delivery and fiscal management, (iii) better stewardship o f the local urban environment, and (iv) a better climate for local economic development. To serve as a vehicle for inter-municipal and inter-governmental knowledge sharing and learning, while helping to lay the foundation for Brazil to build a more robust national urban policy framework.

The estimated sequencing and sizes o f loans under the APL are as following:

I 29.0 I

I Loan 3: Municipali tv o f Teresina I 31.1 I 13.3 I 44.4 I

22. municipalities. This project wi l l be the fifth APL.

The overall loan volume would be limited up to US$240 million for a maximum o f eight

8

23. The Municipality o f Santos Project meets the A P L conditions that the municipal loans focus on poverty alleviation, urban environment, local economic development, and municipal management. The project also meets the specific APL criteria, which state that projects should: (i) focus on the priorities o f urban poverty, environment, economic development, and municipal management; (ii) serve as models o f innovation in municipal management and provision o f services, thereby contributing to cross-municipal learning, replication, and federal policy development; and (iii) comply with the Fiscal Responsibility Law. Regarding the latter, the Santos municipal government has complied with al l the limits established by the Fiscal Responsibility Law, and the municipal government i s far below al l the existing ceilings for debt indicators,

C. Project development objective and key indicators

24. The objective o f the project i s to enhance the management capacity o f the Santos Municipal Government for local economic development and to improve public services in the Northwest Zone o f the Municipality o f Santos.

25. The key indicators o f the project include: (i) initiation o f a plan to address constraints to local economic development by 201 1; (ii) provision o f urban services to households in slum areas; and (iii) rehabilitation and improvement o f the existing macro-drainage system in the Northwest Zone with sufficient capacity to handle 25-year flood levels.

D. Project components

26. The project activities are organized in two components. The activities on the fist component aim at strengthening technical capacity o f the Municipality o f Santos, and the activities on the second component aim at promoting the revitalization o f the Northwest Zone o f Santos. The loan finances the activities under sub-component Project Management, included in Component 1 , and those under sub-component Improving Public Services, included in Component 2. The other activities under the project are financed by the Municipality o f Santos.

Component 1 : Municipal Management Enhancement (US%9 million)

27. local economic development. It includes two subcomponents that will benefit al l city residents.

This component aims to strengthen the technical capacity o f the Municipality o f Santos in

9

1.1 : Enhancing Municipal Management Capacity in Local Economic Development

28. Regional Economic Development Studv: This activity includes carrying out a study to address constraints to development within the Borrower’s territory and to provide guidance on alternatives for reducing the technical, financial and timeframe efforts currently needed to prepare the environmental impact assessments for investments in the Baixada Santista Region. Such study wil l include, inter alia: (i) the consolidation o f a diagnosis o f the environmental issues in the Baixada Santista Region; (ii) impact assessment o f conflicts o f planned and ongoing investment proposals; (iii) an analysis o f alternatives and compensatory and mitigation measures for development scenarios; and (iv) the preparation o f an environmental management plan for the Santos Estuary.

29. This activity includes carrying out feasibility studies for the development o f the City-Port Revitalization Initiative, including: (i) preparation o f a detailed land use plan; (ii) preparation o f an urban zoning plan; and (iii) design and modeling o f the management arrangements for implementation o f the City-Port Revitalization Initiative.

Citv-Port Revitalization Initiative Studies:

30. Information Technolorn Program: This activity includes the development o f the Borrower’s information technology program, including the expansion o f the network in the Northwest Zone as part o f the large-scale municipal effort to improve urban services and standards in such neighborhood. I t i s also included the development o f an arrangement for increasing the program’s efficiency and i t s operation and maintenance capacity. This program wi l l be implemented by the Municipal Government Secretariat, which i s in charge o f the existent large I T municipal program.

1.2. Enhancing Municipal Administrative Management Capacity

3 1. Municipal Land Planning and Control Mechanisms: This activity wi l l strengthen the Borrower’s capacity for land management by complementing the ongoing modernization process introduced in the land cadastre mechanisms, including detailed mapping o f principal organizational and processing procedures, preparation o f recommendations for improvements, and training o f staff responsible for implementing the new procedures. This activity will be implemented by a joint group involving the municipal Planning, Government and Financing secretariats, through a signed framework agreement establishing a multisectoral task force to execute the project.

32. Project Mananement: This activity wi l l support project management capacity, including monitoring and evaluation, auditing, financial management, procurement, and works supervision o f the Project. This activity wi l l be executed by the Municipal Government Secretariat, which i s responsible for the project coordination.

Component 2: Revitalization of the Northwest Zone and Adjacent Hillside (US$79 million)

33. This component focuses on an integrated package o f physical and social investments related to urban environmental improvements in the Northwest Zone o f Santos, with direct benefits to the 90,000 residents o f the Northwest Zone, including about 2,400 households that

10

will benefit from better living conditions through urban upgrading and resettlement. This component includes two subcomponents.

2.1. Addressing Social Inequalities

34. Slum Uugrading and Resettlement: This activity includes (i) the provision o f infrastructure in Vi l la Gilda in the Northwest Zone including, inter alia, construction o f water and sanitation networks, and drainage systems, street opening and paving, installation o f public lighting and a gas pipes network, construction o f bicycle paths and recreational and park areas, construction o f facilities for local commerce and public daycare and community centers, and restoration o f aquatic and riparian vegetation along the canal bordering Vi l la Gilda, and (ii) it will also finance the resettlement o f families residing in st i l t houses built over the canal adjacent to V i l la Gilda and construction o f housing units for the resettled families. This activity will be carried out by the Municipality o f Santos with the cooperation o f the Baixada Santista housing company (COHAB).

35. Imurovements to the Municiual Job Training Program for Low Income Families: This activity includes the rehabilitation o f decentralized municipal facilities which offer professional training courses for low-income families.

2.2 Improving Public Services

3 6. Storm Drainage System Improvements: This activity includes the rehabilitation o f existing canals, purchase and installation o f canal gates, pumping stations, and a centralized operational control system. Flooding in the area i s a result o f intense rain as well as the sea tide. The area’s flood problems will be addressed through the implementation o f a macro-drainage program that will increase flood protection from the current 2-year f lood occurrence rate to a 25- year rate in the Northwest Zone o f Santos, directly impacting i t s 90,000 residents. The resulting decrease in incidents o f flooding should increase the availability o f developable land for investment, as well as enhance the f low o f people and goods within the city.

37. Preventing Risks of Landslides in the Hillside Adjacent to the Northwest Zone: This activity includes preventive works, such as retaining walls and micro-drainage infrastructure, to avoid erosion caused by inadequate drainage in a hilly topography. I t will also finance the acquisition o f vehicles to strengthen the monitoring o f high-risk areas susceptible to unregulated occupation.

3 8. Increasing Urban Greening and Amenities: This activity includes improvements to the Borrower’s Botanical Garden and planting o f street trees in the Northwest Zone, both as a means to promote tourism opportunities, as well as increasing the urban spaces available for absorbing rainwater, and reducing the storm water flow. The Botanical Garden i s the Northwest Zone’s main landmark, as it attracts visitors from other neighborhoods and municipalities and is the principal recreational space in the area. The increase in the number o f street trees and green spaces will enhance the attractiveness o f the urban area and further promote tourism opportunities in the region, as well as provide additional surface area for infiltration and absorption o f rainwater, thus helping decrease the f low o f storm water into drainage systems.

11

E. Lessons learned and reflected in the project design

39. Bank experience in the urban development and WSS sectors has provided valuable lessons which are incorporated into the project, building on such experiences as the Brasilia Environmentally Sustainable Project, Brazil Integrated Municipal Project (Betim), Brazil Water Quality and Pollution Control (PQA) projects in Belo Horizonte (BH PROSAM), Silo Paulo (Guarapiranga), Curitiba (Curitiba . PROSAM), and the Brazil Municipal Lending Program structured as a Horizontal Adaptable Program Loan (APL). The following are some o f lessons learned from these projects, including the Municipal APL:

The municipal governments implementing the projects included in the APL have demonstrated a strong ownership and commitment in implementing the project following the objectives agreed with the Bank. Significant delays have occurred during project preparation due to inexperience within the municipal governments with COFIEX and the Bank project cycle. Projects with strong municipal ownership and commitment to actively monitoring the federal approval process tend to be more able to navigate the lengthy process o f obtaining federal government approval. Changes in local leadership due to elections tend to cause delays in project preparation and implementation, thus it may be advantageous to coordinate the project preparation schedule with the election cycle. Decentralizing the responsibility o f investments to the lowest level possible, such as municipalities, increases accountability and typically improves service quality as a result. Lending at the sub-national level can be an effective means to implement national policy priorities. As has been learned in state-level interventions, sector investments can be used as an entry point for horizontal components aimed at improving the governance o f public sector institutions. Integrated approaches are needed to tackle problems related to urban upgrading, basic services, and the brown environmental agenda. Based on multi-sectoral and inter-institutional principles, an integrated approach to these issues can enhance the benefits o f a wide range o f interventions and contribute to poverty alleviation. In addition, holistic approaches focusing on basic service provision-in particular basic infrastructure-but also paying attention to local social and economic questions are necessary in order to address the complex challenges o f spatial development.

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F. Alternatives considered and reasons for rejection

40. Several alternatives were considered for the delivery o f this and other municipal operations, including: lending through a federal intermediary; direct, stand-alone lending (as was the case in the Bank’s first municipal loan in Brazil, in Betim); and pooling in a Horizontal APL. Lending through a federal intermediary has legal and administrative barriers that today would require legal exceptions in Brazil, and therefore needs a longer time horizon to develop as a viable option. No federal counterpart i s currently prepared to take on the multi-sectoral nature o f this or other municipal operations; lending at the federal level for sub-national interventions has proven to be largely inefficient and ineffective in many sectors in Brazil. The pooling o f eight municipal loans under a horizontal APL was selected above stand-alone operations as a means o f reducing transaction costs, consolidating preparation and supervision, and facilitating the approval process within the Bank by delegating those operations not taken to the Board with the Umbrella PAD to the Regional Vice Presidential level.

41, With regard to alternatives considered for the Santos Project, during preparation a series o f studies was conducted with the goal o f appropriately deciding on the technical, economic, social, and environmental interventions needed to enhance municipal management capacity and for physical and social activities in the Northwest Zone. The alternatives to effectively integrate the PAC program under execution in the Northwest Zone were also broadly assessed. The PAC program i s focusing on the investments needed for slum upgrading, which will be transferred to the municipal government as grants.

111. IMPLEMENTATION

A. Partnership arrangements (if applicable)

42. The project i s free-standing and has no other international co-financiers.

B. Institutional and implementation arrangements

43. The project wi l l be implemented by the Municipality o f Santos (Prefeitura de Santos), through the Secretariat o f Government as the Project Management Unit (UGP) with powers and responsibilities set forth in the Operational Manual. To perform these tasks, the Secretariat o f Government has already constituted a working group including representatives from the municipal secretariats involved in project implementation. This working group has the responsibility o f jointly making project implementation decisions and ensuring that these measures wi l l be undertaken by the respective municipal secretariat. The working group’s composition has been formally created by municipal decree. To provide support to the working group’s operations, three municipal staff members have been formally assigned to the Secretariat o f Government. The UGP includes the following key staffs: a coordinator and experts to handle the technical, procurement, financial management and safeguard aspects o f the project.

44. The Secretariat o f Government, as the UGP, has overseen the project preparation phase and implementing a Japan Policy and Human Resources Development Fund (PRHD) grant for

13

that purpose (TF0903 18). Building on the Secretariat o f Government’s experience during the preparation phase, this arrangement avoids the creation o f a new entity within the municipality for implementing the project and ensures appropriate participation by the other departments involved and dissemination o f the project experience.

Risk

Government’s commitment to efficient project implementation

45. The slum upgrading and resettlement o f families in the Northwest zone o f Santos will be carried out by the Municipality o f Santos with the cooperation o f Comapanhia de Habitaqao da Baixada Santista (COHAB), a legally autonomous agency, under the terms o f a cooperation agreement satisfactory to the Bank, which shall include, inter alia, the technical, institutional, and environmental and social safeguard arrangements a procedures for implement these activities.

Risk Rating JustificationMitigation Measure Residual Risk RatinP

Good level o f responsiveness during project preparation. Low Project support program with strong champion. Project i s a key part o f the municipal government broader development program

C. Monitoring and evaluation o f outcomes/results

46. The results framework provides the basis for the monitoring and evaluation (M&E) system. The development indicators to be used in monitoring the project’s results are presented in Annex 3. The project’s Management Information System, already in development, i s being designed to have the capacity to monitor the project’s physical and financial progress. Overall responsibility for M&E o f project components and activities, as described in the results framework, will l i e with the Municipal Secretariat o f Government. The Secretariat will be assisted in the overall M&E process by specialized consultants when appropriate. The project’s Operational Manual provides specific details regarding M&E responsibilities, including indicators, data collection requirements, and timing and use o f information, complementary to that presented in Annex 3. D. Sustainability

47. Borrower Commitment: The project supports the municipal government’s priorities, and therefore the Borrower is fully committed to the project. The project i s fully demand driven, with the Bank providing added value in the areas o f institutional development and rigorous technical evaluation. The institutional aspects will contribute to regional economic development and to urban expansion. The analysis o f alternatives and the study o f the cumulative impacts o f the project’s proposed interventions ensure that the most appropriate solutions are being used to achieve long-term sustainability. The Municipality o f Santos currently owns and operates a large macro-drainage system, and has management capacity to absorb the additional system.

48. Stakeholder Participation: The project has been discussed thoroughly with targeted beneficiaries, and it i s widely accepted that this i s a priority activity for the municipality. In addition, during project preparation, a social assessment and a stakeholder analysis were undertaken, which verified broad support for the package o f investments.

E. Critical risks and possible controversial aspects

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Government commitment to maintain fiscal stability

Ability to handle procurement

Ability to handle financial management

Ability to handle safeguard policies

Inability of PMS to hedge exchange rate risk in dollar- denominated debt

Delays in project signature

Willingness of all levels of government to participate in inter- governmental coordination strengthening Overall Risk

______~ _ _ _ _ _ ~

Municipal fiscal situation has been robust for several years in a row; i t s indebtedness capacity reaches US$400 million. Municipal revenue has increased steadily. Planned and ongoing new economic investments in the region indicate a continued increase in municipal revenue. Santos’ municipal management i s solid and procures about US$l50 million per year in health, education, and infrastructure expenditures in accordance with the national procurement law. During project preparation the municipality was trained in Bank procurement rules in order to implement a US$700K PHRD. During project implementation, the project will provide technical assistance to consolidate municipal procurement capacity. Training in IBRD procedures and regular missions by the team’s procurement specialist.

* Municipal capacity would meet OPBP 10.02 minimum requirements, following implementation of the FMA action plan. Training in IBRD procedures (financial management and disbursement) and regular missions by the team’s financial management specialist. Borrower has sound safeguard framework and good experience in handling environmental and resettlement programs whose positive results are visible throughout the municipal territory; Project technical assistance to consolidate the executing agency’s capacity in this respect and to support the reduction in overlaps and conflicts between urban and environmental regulation. The fiscal analysis carried out during the project preparation phase provides sound information confirming that Santos’ 2002- 2006 fiscal performance was outstanding, and that Santos has room for further indebtedness of R$721 million (about US$420 mi 11 ion). Recommend that the Borrower seek assistance from a consultant to provide on all necessary documents to the S T N and monitor the process. The Port and the Municipality have already signed an agreement with a timetable and working plan for the City Port Initiative. Project assistance with designing a feasible arrangement for inter- governmental participation in the development of the SEA.

Low

Low

Moderate

Moderate

Low

Moderate

Moderate

Moderate

F. Loan conditions and covenants

49. The loan conditions and covenants are:

15

Board presentation: None

Loadcredit effectiveness: The Loan has been registered by the Guarantor’s Central Bank, which i s standard for projects in Brazil.

Covenants applicable to project implementation:

The municipality will: (i) Maintain, throughout the project implementation, a UGP with powers and responsibilities set forth in the Operational Manual, and not later than six months from the Effective Date, have the UGP fully staffed with personnel with experience and qualifications satisfactory to the Bank; (ii) Prior to initiating the bidding process for any works under Component 2,2.1, enter into an agreement with COHAB under terms and conditions satisfactory to the Bank; (iii) Carry out the project in accordance with the Operational Manual; (iv) Carry out the Resettlement Plan in accordance with i t s terms; undertake the activities o f the EMP; and furnish to the Bank any needed documentation as required by the EMP; (v) Ensure that the terms o f reference for any studies to be carried out under Parts 1.1 (a) and (b) o f the Project shall be satisfactory to the Bank and, to’that end, such terms o f reference shall incorporate the requirements o f the Bank safeguard policies as applied to the advice conveyed and conclusions reached through such studies.

IV. APPRAISAL SUMMARY

A. Economic and Financial analysis

50. Santos had a better fiscal performance than the national average and that o f equivalent municipalities during the 2002-2005 period. Compared to these averages, Santos experienced higher positive primary surpluses, lower net debt services, and higher positive surpluses after fulf i l l ing i t s debt obligations. Santos showed the financial capacity to expand its investment, based on a significant proportion o f municipal tax collection to total revenue. Despite these favorable factors, attention should be paid to i t s prospective social security expenditures and i t s debt dynamics.

51. Looking at the fiscal evolution from 2002 to 2006, Santos maintained high levels o f primary surpluses to net current revenue and i t s net current balances were able to finance nonfinancial capital expenditure plus financial obligations. Santos’ own tax revenue accounted for 53% o f total revenue expansion and, in addition, current revenues were growing at higher rates than expenditures. Because net consolidated debt to net current revenue i s wel l below the FRL ceiling, Santos has room for a further indebtedness o f R$721 mi l l ion in 2006 Reais. Furthermore, substantial current revenue resulting from i t s own tax base and state transfers, together with the low level o f indebtedness, suggest that Santos has sufficient capacity to meet potentially higher debt service obligations.

52. The prospect o f sustained growth o f the Brazilian economy assures that current revenues will be expanded at significant growth rates. Santos’ healthy fiscal situation will be maintained,

16

and it wi l l finance most o f i t s investment and meet i t s obligation under the Fiscal Responsibility Law.

53. The project wi l l generate a broad set o f benefits. The main benefits include: urban and environmental rehabilitation o f areas currently occupied by slums; new housing units for low- income families; property value appreciation in the Northwest Zone, especially in the area targeted for urban upgrading; rehabilitation o f existing housing units; generation o f jobs and income for the low-income population; revitalization o f the Dique da Vila Gilda area; improved access to public services; reduced levels o f crime in the region; resettlement o f individuals from areas o f high personal and environmental risk; property value appreciation due to reduced geotechnical risk in the Morros area; property value appreciation due to improvements in the macro-drainage system; reduction in the maintenance and operation costs o f the existing macro- drainage system; reduction in health costs related to waterborne illnesses, infant mortality, and geological accidents; reduction in private losses due to flooding; facilitation o f urban densification, which i s currently unfeasible due to flooding conditions; gains in working hours for the residents o f the Northwest Zone due to uninterrupted public transport during storm events and high tides; rehabilitation and improvements to recreational squares and parks; improvements to the urban and environmental landscape; and improvements to the city’s botanical garden.

54. However, some o f these benefits are difficult to value monetarily, and would require considerable data collection and analysis efforts to evaluate. Therefore, the selected economic analysis methodology focuses on evaluating those benefits that generate higher and measurable resources, including: (i) urban improvements and the provision o f resettlement housing for low- income families living in slums; and (ii) improvements to drainage services and geotechnical risk prevention. The methodology adopted to capture these benefits was the Hedonic Price Model, which uses a sample of housing price data to assess the implied value o f infrastructure and amenity improvements.

55. The economic analysis (see details in Annex 10) demonstrates that the proposed project will generate benefits o f R$199 million and an Internal Rate o f Return (IRR) o f 20.8%. The sensibility analysis demonstrated project feasibility in conditions o f reduced benefits and cost increases.

56. The risk analysis was carried out by using a Monte Carlo and Latin Hypercub methodology. The results demonstrate that there i s a 77% chance for the project to achieve positive Net Present Value (NPV), and 80% probability o f the project achieving an annual IRR o f 3 12%. Thus, the risk analysis confirmed the results o f the feasibility analysis, and indicated that the intervention i s economically viable and that the risks are controllable.

17

B. Technical

57. Various technical studies were carried out in the course o f project preparation, resulting in a major redesign o f the infrastructure component. As a consequence, a revised concept study for the macro-drainage infrastructure was developed and the detailed engineering designs are under execution, which will allow for c iv i l works bidding in the project’s f i rst year o f execution. The main aspects o f the macro-drainage concept study are presented below:

58. The methodology used for selecting the structural design o f the macro-drainage system was based on the application o f mathematical hydrological and hydraulic simulation models for a number o f alternatives to be designed into the system, resulting in the selection o f the most appropriate set o f interventions for the chosen alternative.

59. The design o f structural alternatives followed a logic based on topographic features, the influence o f tidal fluctuations, and the volume o f flows from heavy rainfall in the region. In addition to technical constraints, institutional constraints were also incorporated into the design, due to the inclusion o f a drainage area located in Municipality o f SZio Vicente in the Jovino de Melo basin.

60. The plan to carry out the works in phases implies increasing the demand for the proposed structures. The Santos system i s expected to have insufficient elasticity to handle project volumes (TR = 100 years) in isolation. However, even under these conditions, there i s s t i l l a major attenuation o f maximum water levels and even the more downstream stretches should not exhibit hydraulic insufficiencies. This i s the case o f the stretch o f the Jovino de Melo channel downstream from the pumping station that will divert f low to the Roberto Mol ina channel. For flooding with less recurrence time, which is the case for a TR o f 25 years, the system performs satisfactorily and does not cause critical water levels that would provoke overflows along the Eleonor Roosevelt and Jovino de Melo channels.

61. The urban upgrading investments are: (i) provision o f basic infrastructure and urban layout improvements in the part o f the slums occupying areas that are appropriate for receiving such investments; and (ii) removal o f households currently living in the low-lying areas occupied by the slums, in which st i l t houses have been built. The intervention will consist o f preparing detailed engineering designs and simultaneously carrying out consultation on the solutions being designed, and carrying out the civ i l works which also includes activities to inform the community and to insure participation.

C. Fiduciary

62. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 and revised October 2006, “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. Procurement activities will be carried out by a Special Bidding Committee created under the municipality’s Procurement and Supply Department (DELIS), which i s staffed by over 30 professionals. The Special Bidding Committee will be staffed by 5 procurement

18

officers. An assessment o f the capacity o f DELIS to implement procurement actions for the project was carried out in April 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and the municipality’s relevant central unit for administration and finance.

63. The issueshisks concerning the procurement component for project implementation have been identified and include a lack o f familiarity with the Bank’s procurement rules and procedures. The agreed corrective measures are to set up a Special Bidding Committee, hire a procurement consultant, and train the committee’s members.

64. The overall project risk for procurement i s low.

65. Financial management: The Borrower (Municipality o f Santos-SP) will implement the project through seven municipal secretariats, under the coordination o f a working group (WG), within the Secretariat o f Government (SG). Project planning, budgeting, budget execution, and accounting will be decentralized in the participating entities, using the municipality’s financial IT systems. Budget consolidation and reporting will be handled by the WG, using the municipality’s financial IT systems and receiving the assistance o f specialized consultants. The current FM structure o f the GS was assessed and i s considered well staffed with qualified professionals.

66. financial management and disbursement aspects o f the Project.

The Municipal Secretariat o f Economy and Finance (SEFIN) will be responsible for the

67. residual overall FM risk associated with the project i s rated as moderate.

The Risk Assessment Matrix in Annex 7 presents the project’s potential FM risks. The

68. During the FM assessment, the FM team provided orientation in FM and disbursement issues and helped the Secretariat o f Government to prepare an FM Action Plan to improve the identified weaknesses. The successful implementation o f the risk mitigation measures and the FM Action Plan will further improve the project’s financial management arrangements and decrease the project’s risk.

’

D. Social

69. The Santos Novos Tempos Project consists o f a range o f activities to benefit the population o f the Municipality o f Santos as a whole, but the bulk o f investments in infrastructure i s focused on improving the quality o f l i f e o f the population living in the city’s Northwest Zone. These investments are concentrated on the large majority o f the low-income population living in Santos. The majority o f Santos’ slums are located in the Northwest Zone. Approximately 60% o f the slums are composed o f st i l t houses over water surfaces. In addition to the urban, social, and environmental constraints associated with the extremely unhealthy living conditions in the slums, the area i s frequently affected by flooding caused by intense rains combined with sea tides.

70. The project includes the upgrading o f the slum area on appropriate lands, thus allowing for investments in roads, water, sanitation, drainage, recreational areas, housing improvements,

19

and community equipment. Approximately 2,400 families live in those slums, o f which, about 1,100 fami l ies living in st i l t houses wi l l be resettled to new houses in a nearby housing resettlement complex.

7 1. The project also includes a comprehensive set o f activities aimed at improving the family social conditions beyond the urban and housing improvements. This includes broadly tested participatory mechanisms, environmental education programs, income generation activities, cultural and leisure programs, and special assistance to youth.

E. Environment

72. Federal, state, and municipal environmental regulations are very strict and institutional capacity i s adequate. Furthermore, the Office o f the Attorney General’s Environmental Department i s extremely active in the Baixada Santista. The region has good environmental indicators, especially considering the major environmental catastrophe that affected the region in the 198Os, caused by the pollution from the Cubatgo industrial complex. Today, the most critical remaining sources o f pollution are the untreated household wastewater discharged into rivers in the slums, as well as solid waste disposed improperly in these areas. The PAC program’s investments, which address improvements in slums in several municipalities o f the Baixada metropolitan region, combined with the proposed project, wi l l significantly improve environmental quality in the region. In Santos, the combined investments from the PAC and the proposed project wi l l provide appropriate urban and housing solutions to 100% o f the fami l ies currently living in slums.

73. As part o f i ts objectives and design, the project has a strong environmental emphasis. I t will address the most critical environmental issues in the Municipality o f Santos: flooding events combined with inadequate urban standards in slums located in the Northwest Zone o f Santos. Flooding in the slums and surrounding neighborhoods i s due to the area’s outdated and insufficient drainage infrastructure, which precludes further investments in sanitation and solid waste collection. Consequently, the untreated wastewater discharged into the rivers contaminates mangroves and beaches. Moreover, the population in the slums i s used to throwing trash directly into the rivers and under their own st i l t dwellings. Sea tides carry the trash to the drainage canals, clogging the canal gates and thus increasing the likelihood o f flooding, as well as increasing the levels o f water contamination and associated waterborne diseases. Sea tides also carry solid waste to mangrove areas, causing severe impacts on biodiversity, and to the beaches, causing severe impacts on tourism activities.

74. The EIA found that the range o f potential environmental impacts (positive or negative) relates primarily to flood control and drainage, biodiversity, environmental management, and strategic planning. The proposed project i s expected to have a highly positive impact from an environmental standpoint. I t would improve the environmental quality o f the Northwest Zone’s urban wetlands and waterways through the implementation o f improved flood control mechanisms, restoration and protection o f the natural hydrological conditions o f the Silo Jorge River, improvements in quality o f the water bodies (rivers and estuary) through the removal of. irregular untreated wastewater discharge and solid waste disposal from the informal settlements (mostly composed o f st i l t houses), and by promoting the integration o f environmental concerns

20

in long-term municipal development planning. Moreover, project-supported capacity building and training activities targeting regulators, planners, decision-makers, and stakeholders would induce a series o f behavioral changes among urban residents, which would be expected to bring about positive changes for the environment.

F. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [XI [I Natural Habitats (OPBP 4.04) [XI [I Pest Management (OP 4.09) [XI [ I Physical Cultural Resources (OP/BP 4.1 1) [XI [ I Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [I [XI Forests (OP/BP 4.36) [XI [ I Safety o f Dams (OP/BP 4.37) [XI [I Projects in Disputed Areas (OPBP 7-60). [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI

75. The project i s classified as Category A. In accordance with Environmental Assessment (OP4. 01), an Environmental Impact Assessment (EIA) was conducted by the borrower with support from a consulting firm. The EIA, including a Resettlement Action Plan, evaluates the existing conditions, identifies potential direct and indirect environmental impacts, evaluates different alternatives (including the no-project scenario), and proposes measures to mitigate negative impacts and enhance positive ones. The Environmental Management Plan incorporates these measures together with their associated costs, responsibilities, and schedule. A public consultation process was carried out and documented, including public meetings to discuss (a) the EA terms o f reference (TORs) on March 26,2008, and (b) the final EA on October 10, 2008. The disclosure dates for the EA TORs were March 13, 2008 and for the final EA September 26, 2008. Document was sent to InfoShop on August 15, 2008. The disclosure date in country was October 3,2008.

76. Natural Habitats (OP4.04) and Forest (OP4.36) Policies are triggered because the project environmental setting and activities to support the rehabilitation and protection o f degraded mangrove areas. The Pest Management Policy i s triggered due to the envisioned tree planting activities which would require the control o f leaf-cutter ants and other pests until the seedlings are firmly established.

77. The Involuntary Resettlement Policy (OP4.12) i s triggered because the project includes housing solutions to resettle the population currently living in st i l t houses in the slums, and the st i l t houses wi l l be demolished to allow for mangrove rehabilitation. In addition, the project wi l l also entail the resettlement o f a few fami l ies living in hill areas found to be o f high risk for landslides. Although slum upgrading and resettlement wi l l be financed by counterpart funds,

By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas.

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implementation wil l strictly adhere to Bank safeguard policies on Involuntary Resettlement. The disclosure date in country was October 3,2008 and sent to Infoshop on November 12,2009.

78. The Safety of Dams Policy (0104.37) i s triggered because the project includes the construction o f a retention pond to temporarily store excess drainage coming from the hilly area during large storm events. The retention pond i s relatively small (less than 8 meters in height in a 25-year storm event). The terrain i s privately owned and has never been used because it retains storm water naturally, making it unsuitable for urban use.

. 79. The Physical Cultural Resources Policy (OP4.11) i s triggered because the project i s being implemented in an urban area. Chance find procedures are addressed in the EIA and have been incorporated in the Environmental Manual for Civil Works.

G. Policy Exceptions and Readiness

80. No policy exceptions are anticipated. The policy i s ready for implementation: the Operational Manual i s prepared and approved by the Bank; the engineering designs are prepared, which wi l l allow for initiating the bidding for the works construction when the Loan Agreement i s signed; the project coordination unit i s fully staffed and has acquired experience in Bank procurement and financial management through the successful implementation o f a PHRD grant.

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Annex 1: Country and Sector or Program Background BRAZIL: Municipality of Santos Project: Santos Novos Tempos

1. The proposed Santos Municipality Project i s one o f eight proposed municipal projects in Brazil that are being presented under a broader Adaptable Program Loan (APL). This proposed operation, known as the Brazil Municipal Lending Program (BMLP), represents a pooled, direct-lending program o f municipal support developed in line with the Municipal and City Strategy for Brazil. As a combined municipal lending program, the eight projects represent a total loan amount o f some US$240 million and a total municipal population o f some five million people. The objectives o f the BMPL are to: (i) improve the living conditions o f the urban poor; (ii) promote innovation and improvement in the delivery o f urban services, local governance, and municipal management; (iii) facilitate local economic development; and (iv) foster stronger fiscal discipline while serving as a vehicle for inter-municipal and intergovernmental knowledge sharing.

2. The Horizontal APL approach aims to draw on the comparative experiences and integrate the municipal portfolio under one thematic umbrella concept. Whi le each loan i s being prepared individually, efficiency gains are being achieved by preparing the loans with common teams, themes, and methodological and analytical approaches. The BMPL i s designed in two loan groupings, corresponding to the anticipated degree o f readiness o f the preparation o f each project, with each loan being individually appraised and negotiated.

3, Alternatives considered and reasons for rejection:

0 Stand-Alone SILs: The option o f stand-alone Specific Investment Loans to each o f the municipalities was rejected because, while each operation would provide a high economic and social return, it was considered essential to capture the combined effects o f the individual projects, which are potentially more than just the sum o f the parts. Separate SILs would squander the opportunity to create a structure for scaling up the results. Promoting such synergies i s essential in the context o f Brazil, where the relatively modest scale o f the World Bank’s lending must be leveraged to obtain the widest possible impact.

0 “Wholesaling” approach to lending: The possibility o f providing “bulk” financing to the federal government for on-lending to municipalities (often referred to as a “wholesaling” approach) was considered, but, based on analytical work’ and policy dialogue, i t was determined that this option i s not immediately viable. The development o f wholesaling mechanisms for municipal lending i s a medium to long- term agenda in Brazil. I t s progress wi l l depend on political economy factors influencing the appetite for market-based approaches and the complexity o f the solutions considered. Opening up the potential o f financial markets to support municipal development in Brazil remains a priority o f the Bank’s policy dialogue.

0 A multi-city group lending approach through an APL was therefore determined to be the best option, given the interest o f the federal government and the municipalities to

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move ahead with a program o f Bank assistance. The APL, especially through i t s proposed knowledge sharing activities, also allows the piloting and consolidation o f standard methodologies and approaches (for preparation, appraisal, implementation, M&E) that would be valuable under a possible future wholesaling mechanism.

4. which has been met by the Municipality o f Santos Project:

Lending operations under the BMLP would have to meet the following eligibility criteria,

0

0

Projects should focus on the above-mentioned priorities o f urban poverty, environment, economic development, and municipal management. Projects should serve as models o f innovation in municipal management and provision o f services, thereby contributing to cross-municipal learning, replication, and federal policy development. Projects should comply with the Fiscal Responsibility Law.

.

0

5 . The objectives o f the Brazil Municipal Lending Program are:

0 To make tangible improvements in the participating municipalities, including (i) better living conditions for municipal residents generally and low-income communities particularly, (ii) improved capacity for service delivery and fiscal management, (iii) better stewardship o f the local urban environment, and (iv) a better climate for local economic development. To serve as a vehicle for inter-municipal and intergovernmental knowledge sharing and learning, while helping to lay the foundation for Brazil to build a more robust national urban policy framework.

6. The Municipality o f Santos, with a population o f 420,000, distinguishes i tse l f from the State o f SBo Paulo’s (ESP’s) other 645 municipalities because: (a) it hosts the largest port in Latin America, the Port o f Santos, through which flows 30% o f the country’s commercial exports and imports; (b) it has significant political and economic influence on the ESP and especially on the Baixada Santista, which i s one o f the state’s three metropolitan areas; (c) i t s geographic proximity to SBo Paulo has resulted in strong economic t ies to the metropolitan region; and (d) it has the third-best Municipal Human Development Index (MHDI)9 in the state, the fourth best in the Southeast Region, and the fifth best in the country. Nationally and in the region, Santos i s also well ranked in terms o f fiscal management. Municipal per capita tax revenue i s among the highest in the Southeast Region and i t s tax revenue composition, about

The Human Development Index (HDI) i s a comparative measure o f l i f e expectancy, literacy, education, and standard o f living for countries worldwide. It i s a standard means o f measuring well-being and also the impact o f economic policies on the quality o f l ife. The index was developed in 1990 and has been used since 1993 by the United Nations Development Program in its Human DeveloDment Report. In Brazil, the federal Instituto de Pesquisa Econdmica Aplicada (IPEA), associated with similar state institutions (Fundaqlo SEADE in the case o f SBo Paulo) has applied the same HDI methodology for municipalities, creating the MHDI. The Census carried out every ten years provides the data for calculating the HDI and MHDI.

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50% o f which corresponds to local taxes, raises Santos to a select group o f municipalities that have achieved high collection levels and well-balanced tax revenue profiles.”

7 , Baixada Santista Metropolitan Region. The Municipality o f Santos i s part o f the Baixada Santista Metropolitan Region (BSMR). The BSMR encompasses 1.4 million people in nine municipalities and includes a large concentration o f public and private investments developed around key strategic sectors, including logistics, petrochemicals, steel, and energy. These are centered on the large Port o f Santos, a 7.7 million m2 network o f highways, railroads, and pipelines that account for 30% o f Brazil’s trade balance as well as most o f that from Paraguay and Bolivia. The port’s annual freight volume has grown 40% over the last four years, and investments o f US$3 billion have been initiated to increase the port’s capacity from i t s current 81 million tons to 350 million tons in 2022. A new player in the region, Petrobras, i s carrying out investments o f US$18 billion in gas and oi l extraction in the Bay o f Santos, which are quickly gaining a key role in steering the region’s economic dynamics. The other strategic sectors in the Municipality o f Santos are: (i) urban development investments in commercial and residential buildings, (ii) research and development through eight universities operating in Santos; and (iii) domestic and international tourism (transatlantic cruisers bring about 700,000 tourists per year to Santos). Two additional key characteristics o f the BSMR and o f the Municipality o f Santos are the critical scarcity o f land for urban use, and the overarching role o f the federal and state environmental sectors in enforcing the environmental regulation to protect the natural environment covering about 70% o f the area.

8. Baixada Santista institutional framework. The three levels o f government-federal, state, and municipal-ach play a critical role in the BSMR. The federal and state governments’ involvement i s focused specifically on three sectors: logistics (aerial, terrestrial, and maritime access to the port, and port management), energy (gas, oil extraction, and energy supply exclusively to the port), and natural environmental protection (environmental licensing). The municipal governments’ focus i s on urban development, research and development, tourism, housing and social development. The lack o f coordination and common priorities among the federal, state, and municipal governments i s largely acknowledged in the region as the main obstacle to regional development.

9. The Port of Santos institutional framework. The Port o f Santos, as well as the land used by the port, belongs to the federal government. I t i s managed by the Companhia Docas do Estado de Silo Paulo (CODESP), which reports to the Federal Secretariat o f Ports. The port’s 62 terminals are operated by private sector companies through arrendamento (concession) contracts. The Municipalities o f Santos, Cubatilo, Guaruja, and Sgo Vicente participate in the port’s management through the Conselho de AdminstraqGo Portudria (CAD), which reviews and approves the port’s norms. CAD’S president i s appointed by the federal government and the council includes four blocks o f participants: public sector (state and municipal governments), private operators, workers, and port service users. Each block i s entitled to one vote. The CAD i s the institutional setting for the municipalities to influence the port’s operational regulations.

lo Santos expects to collect about US$500 million in tax revenue by the end o f 2007, corresponding to a per capita revenue o f about RS$2,300.00, while the average per capita revenue in the southeastern region i s approximately RS$l,300.00. S T N and Instituto Brasileiro de Administragao Municipal (IBAM).

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10. The private sector in the BSMR i s a key player: it i s largely responsible for economic investments in the region and focuses on the industrial complex o f CubatBo, logistics, and the operation o f the port’s terminals. The region has increasingly attracted private capital in recent decades. The privatizations carried out by the federal and state Governments throughout the 1980s and 1990s in the steel sector and in port operations played a major role in reshaping the region’s economy. Today, many more investments are underway, including large private investments in railroads, logistics (especially for exporting ethanol), port expansion, and in expanding the industrial complex. The port expansion i s one o f the main areas o f interest: the construction o f a US$300 million private port was initiated after nearly nine years o f planning, which included lengthy negotiations with the environmental sector. Excluding the industries’ port, this i s the first private port in Santos, increasing the port’s current capacity by 15%. Discussions are underway to begin the construction o f a second private port (estimated at US$3 billion), which wi l l more than double the port’s current capacity, and involves the federal government and private groups, including Japanese funds as part o f the commitments for exporting ethanol to Japan.

11. Port ‘infrastructure expansion i s possible almost exclusively along the le f t side o f the canal in the Munici alities o f Guaruja and Santos. The targeted area located in Guaruja i s within the “official port,” ’ all o f whose land belongs to the federal government. Over the past two decades, approximately 4,500 low-income families have informally occupied this area. Their resettlement i s included in the PAC funds in order to allow the reintegration o f the area into the “official port.” The target area for expansion in Santos i s located outside the area o f the “official port.’’ In this area, the first private port i s already under construction and the second i s in the planning phase, as described in the paragraph above. This set o f private investments i s planned to be the centerpiece o f the expansion in port capacity. Other key pieces o f the port expansion are the ongoing federal government investments in enlarging the main road systems to access the port within the cities o f Guaruja and Santos, and the dredging o f the port canal.

P

12. One o f the main challenges to port infrastructure expansion i s obtaining environmental licenses, especially for the larger private port that i s in the planning stages in the continental part o f the Municipality o f Santos. The issuing o f environmental licenses for the private port under construction has increased the expectations o f also obtaining licenses for the second port. In the region, it has been said that the issuing o f environmental licenses took nine years and included requirements that increased the cost o f the port by 30%, but did not affect the projected investments’ returns. These private ports in the continental area are included in the Port Master Plan and in the City o f Santos Master Plan, both from 2006. The latter also provides the urban regulation required for these port expansions.

13. The Municipality of Santos has developed a strategic vision for promoting the BSMR’s development opportunities and addressing obstacles to development. It includes a comprehensive plan to maximize the benefits that the city can gain from regional economic development, in addition to addressing some important obstacles that hinder regional development. Some o f the key themes addressed by this plan are:

The official port of Santos has 61 berths in Santos and Guar@. Outside the official port, the steel industry (COSIPA) has 6 berths and the fertilizer industry (FOSFERTIL) has 5 berths, all them in Cubatgo.

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4 Broadening the scope o f industrial port activities: The port o f Santos functions just like a “channel” through which 30% o f Brazil’s international trade passes. As such, i t s contribution to the regional economy i s significant but mostly lower than i t s enormous potential. Santos, along with the other three municipalities around the port (Guaruja, Cubatilo, and Silo Vicente) and other key regional stakeholders such as the Federaqio das Indtistrias de S i 0 Paulo (Silo Paulo Federation o f Industries-FIESP), envisage a different port. Based on their vision, the port should be conceived as a broader, integrated cluster o f port-related activities. This would strongly contribute to increasing the port’s competitiveness and promoting economic development in the region. To this end, the port’s long- term planning i s a task that should involve the three levels o f government and the private sector, which must all agree on common goals and priorities. The municipality has already taken several initiatives to begin this integration; these include specifying areas in the 2006 city Master Plan for “port-industry activities.” This broader approach would greatly contribute to generating added value in the region, which would increase municipal tax revenues and regional job opportunities.

b) Promoting port-related activities in the Municipality of Santos: The promotion o f activities with potential to generate significant added value in the city i s a main goal for the municipality. To this end, Santos has already initiated actions to promote port-related activities that fit under the scope o f the authority o f a municipal government. One o f these initiatives i s an important urban operation to create large-scale “waterfront real estate” close to downtown and including adjacent old port warehouses. The preliminary Master Plan and pre- feasibility studies have been prepared. The operation has been conceived to be executed in partnership with the private sector and would include investments for a special port for cruise ships, hotels for tourists and businessmen, Petrobras offices, restaurants, a convention center, a port for passengers coming and going from Guaruja to Santos, and waterfront recreational activities. .

4 Addressing land scarcity and benefiting the poor: The severe scarcity o f land available for urban use i s a significant obstacle to the city’s development and a major constraint affecting the poor. To this end, the municipality i s pursuing two lines o f action: (i) Promoting development and increasing population density in the “Zona Noroeste ”(Northwest Zone), which encompasses the poorer neighborhoods o f Santos and where the population density coefficient has not yet achieved the maximum determined by the urban regulations in place. Frequent flooding in this area, caused by lack o f appropriate macro-drainage systems, i s among the main causes holding back development in this area. The municipality has requested financing from the federal government, through the PAC, and from the World Bank to carry out a comprehensive infrastructure investment program in this area. The development o f this area and the waterfront real estate operation are connected since both areas are in close proximity and under each other’s economic influence. (ii) Pushing for the implementation o f metropolitan transportation solutions to promote urban growth

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in the neighboring municipalities, where land availability i s higher and land prices are lower. The technical and financial solutions for metropolitan transportation are at an advanced stage and the state has informed that it would finance about 30% o f the costs to support arrangements involving private sector participation.

14. Facilitating intergovernmental coordination: Intergovernmental (federal, state, municipal) coordination and common goals are fundamental issues for regional development. To this end, the municipality i s leading broad inter-institutional discussions aimed at the drafting o f a “Pact for Territorial Management.” This institutional coordination tool i s likely to be signed by federal, state, and municipal authorities in the near future. The short-term goal o f this initiative i s to agree on a priority agenda that would benefit from a special forum for expediting and integrating technical and bureaucratic procedures. The long-term goal i s to create a “special development zone” provided with more efficient bureaucratic procedures.

15. The World Bank Group program in the BSMR includes ESWs, lending operations and grants in partnership with the public and private sectors, and IFC involvement. The two major studies under final preparation are the “Brazil Logistical Framework,” one o f whose three objectives i s to look at the Sgo Paulo State logistical corridors &e., the Baixada Santista) and a forthcoming “Port o f Santos Analysis.” Two direct lending operations with municipal governments are underway in the Municipality o f Cubatgo where a proposed project i s in the negotiations stage and in the Municipality o f Santos where a proposed project i s being prepared. The IFC i s involved in financing several industries in the Cubatgo petrochemical and steel industrial complex. The IFC i s also discussing the provision o f advisory services to the Municipality o f Santos which wants to leverage IFC expertise in order to design a PPP financing modeling for investments in a waterfront marinehourismhusiness complex. In addition, through the Cities Alliance Program, a grant to support initiatives related to metropolitan development issues and poverty i s under preparation.

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Annex 2: Major Related Projects Financed by the Bank and/or other Agencies BRAZIL: Municipality o f Santos Project: Santos Novos Tempos

Sector Issues

Ban k-Financed Projects

Urban and Municipal Development

Water Resources Management

Other Development Agencies

Projects

BR-PE-049265 Recife Urban Upgrading Project (State o f Pernambuco)

BR-PE-089011 Municipal Lending Program I Uberaba-Agua Viva

BR-PE-082328 Integrated Municipality Project - Betim Municipality

BR-PE- 089440 Brasilia Environmentally Sustainable Project

BR-PE- PO94 199 Rio Grande do SUI Integrated Regional Development

BR-PE-0943 15 Sao Luis Enhancing Municipal Governance and Quality o f Life Project PO943 15

BR-PE-088966 Teresina Enhancing Municipal Governance and Quality of Life Project

BR-PE- 006449 Cearh Integrated Water Resources Management Project

BR-PE-035728 State of Bahia Water Resources Management

BR-PE-089440 Brasilia Environmentally Sustainable Project

BR-Municipality o f Juiz de Fora Urban Environmental Rehabilitation (IDB) BR- Municipality of Port0 Alegre Environmental Rehabilitation (IDB)

Ratii Implementation

Progress S

Latest Supervision (PSIUICR) ,S'2

Development

MS

S

MS

S

S

S

S

HS

MS

Objective S

S

MS

MS

S

S

S

S

S

MS

'* Provide for Bank-financed projects only.

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Annex 3: Results Framework and Monitoring

BRAZIL: Municipality of Santos Project: Santos Novos Tempos

Results Framework

I PDO

To enhance the management capacity o f the Santos Municipal Government in local economic development and to improve public services in the Northwest Zone o f the Municipality o f Santos.

I

I Intermediate Outcomes

COMPONENT 1

Sub-component 1. I : Improved capacity to promote local economic development

Project Outcome Indicators

1. Commencement o f implementation o f plan to address constrains to local economic development by 201 1;

2. At least 2,400 households in slum areas o f the Northwest Zone are provided with a comprehensive package o f municipal services (including water and sanitation, street paving, drainage, public lightning, gas network, recreational areas, and social services);

3. Establishment o f a macro- drainage system that will solve flooding problem in the Northwest Zone and that has sufficient capacity to handle 25-year flood levels.

Intermediate Outcome Indicators

0 Preparation o f a regional economic development study

0 Preparation o f a plan to reduce environmental licensing time

0 Preparation o f a modern land use d a n based on

Use o f Project Outcome Information

Indicators measure impact o f strategic investments in infrastructure and institutional capacity

Use o f Intermediate Outcome Monitoring

Demonstrates improved capacity and commitment to long-term planning related to local economic development

Demonstrates measures to improve intergovernmental coordination in facilitating private investment

Completed plan indicates readiness for implementation

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Sub-Component 1.2: Improved capacity for land management

COMPONENT 2

Sub-component 2.1: Improved quality o f l i f e for inhabitants o f the Northwest Zone

Sub-Component 2.2: Improved urban environment for targeted areas o f Santos

best practices for city-port integration

0 Design and installation o f Infovia network in the Northwest Zone

~ PrepiGtion o f plan to improve macro-processing routines for land cadastre

0 At least 2,400 additional households receiving 24- hour water supply services

At least 2,400 additional households with sewage connections

Increased satisfaction o f resettled population with municipal service delivery

0 50% reduction in percent o f Santos fami l ies living in flood-prone areas

Floodgates completely repaired and operating effectively

0 50% reduction in percent o f land area affected by recurrent flooding

o f large investment project

Design and installation indicates removal o f technology constraint to private investment in area

Completed plan indicates progress in review and improvement o f the system

Increase in beneficiaries demonstrates improved equity in service delivery

Satisfaction indicates improved equity

Reduction in families in flood areas indicates improved safety

Functionality indicates improved safety

Reduction in flood affected areas indicates increase in habitable land

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Annex 4: Detailed Project Description BRAZIL: Municipality of Santos Project: Santos Novos Tempos

1. The investments proposed in the project will respond to a set of physical and institutional needs of the Municipality of Santos. It i s envisioned that the set of identified investments will directly contribute to meeting the project's overall objectives-enhancing the management capacity of the Santos Municipal Government in local economic development, and improving public services in the Northwest Zone o f the city-and to improving the lives of project area inhabitants.

2. The project comprises initiatives designed to strengthen municipal management capacity in local economic development. These activities are targeted to provide the municipal government with technical analyses and proposals to address priority development issues in the region. The broad goal i s to support the strategic vision pursued by the Municipality of Santos to improve the enabling environment necessary for the region to achieve i ts economic growth potential. The primary areas of focus are the institutional bottlenecks that undermine the region's economic growth and the challenges of designing new business models required for tackling new economic opportunities available to the region.

3. The' project also includes investments designed to improve the urban environment in the Northwest Zone of Santos through a set o f investments in public services, housing, drainage, 'and urban amenities that directly benefit the poorest families living in slums and indirectly benefit the population of the entire area and the city.

4. The project activities are organized in two components. The activities on the fist component aim at strengthening technical capacity of the Municipality of Santos, and the activities on the second component aim at promoting the revitalization of the Northwest Zone of Santos. The loan finances the activities under sub-component Project Management, included in Component 1, and those under sub-component Improving Public Services, included in Component 2. The other activities under the project are financed by the Municipality of Santos. The project components and subcomponents are described below:

Component 1: Municipal Management Enhancement

Subcomponent 1.1. Enhancing Municipal Management Capacity in Local Economic Development

1.1. I. Regional Economic Development Study

5. A regional economic development study will be carried out under the framework of the SES, focusing particularly on environmental issues since those are determinant elements in the local geographic and economic context. This activity will finance a study to address constraints to development within the Borrower's territory and to provide guidance on alternatives for reducing the technical, financial and timeframe efforts currently needed to prepare the environmental impact assessments for investments in' the Baixada Region. Such study will include: (i) the consolidation of a diagnosis o f the environmental issues in the Baixada Region; (ii) an impact assessment

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of conflicts o f planned and ongoing investment proposals; (iii) an analysis o f alternatives and compensatory and mitigation measures for development scenarios; and (iv) the preparation of an environmental management plan for the Santos Estuary. The assessment will be developed with a broader view o f the regional development but the detailed discussion will be focused on the opportunities created to the Municipality o f Santos.

6. The study will build upon relevant studies of the region’s economic dynamics and fbrther opportunities already developed by the public (federal, state, and municipal governments) and private sectors. A group o f relevant studies about environmental issues in the Baixada i s also available. A key study i s a thorough assessment o f al l relevant public and private interventions planned and ongoing for the Baixada by the economic Sectors present in the region. This study demonstrates that the prospects for investment in the region are enormous and provides a platform for a broad discussion on how to reconcile this economic potential with the legal framework that protects the regional environment. The preparation process wil l include periodic consultation with public and private stakeholders to build the needed consensus.

1.1.2. City-port revitalization initiative

7. The city-port revitalization initiative i s physically and programmatically imbedded within a comprehensive municipal program aimed at promoting economic and social revitalization in the historic downtown area of the city o f Santos. This activity will include feasibility studies for the development o f the City-Port Revitalization Initiative, such as the preparation o f a detailed land use plan, zoning plan, and the development of management arrangements for implementation of the Initiative.

8. This activity wil l build on the following ongoing and planned studies: (i) assessing the integration of ongoing and planned programs aimed at promoting the historic center’s revitalization and the linkage of these programs with the city-port initiative; (ii) macro planning to assess the integration o f the historic centerkity-port initiative with regional development prospects; (iii) creation o f a promotion strategy; (iv) preparation of a detailed land use plan; (v) preparation of an urban zoning plan; and (vi) institutional and financial arrangements. The Municipality o f Santos has executed a number of programs aimed at improving the downtown area. These programs aimed at rehabilitate the downtown historic area, which are physically and programmatically integrated with the city-port initiative, although outside the project scope, include the following:

a) Progrumu Alegra Centro (Promoting a Happier Downtown): This program was designed and i s implemented by the municipal government. It comprises a set o f actions (policy improvements and investments) aimed at stimulating the revitalization o f the downtown area. Implementation began in 2003. The main results are: 1,293 new business activities created in the “cultural protection area” (project area) totaling 4,353 businesses; 150 municipal fiscal exemptions (IPTU, ISS, ITBI); US$80 million in public and private investments; 224 revitalization works carried out in cultural buildings; from 2006 to 2007, the number of buildings not in use fe l l from 373 to 269 and the number o f degraded buildings from 174 to 133.

36

b) Rehabilitation of degraded inner city tenements: Designed jointly by the municipal government and the State Housing Company (CDHU), this program includes construction of housing solutions, which are offered to low-income families through highly subsidized mortgage financing. The owner o f the building, once the families have left, has the alternative of selling it in the market or accessing financial programs available for business development. I t has been in implementation since 2004.

c) Ecological Park: Studies and changes in legislation are being carried out to transform the already closed port dumpsite into an ecological park, which will create a landscape solution connecting the historic center to the sea.

d) PRO-URBE: This program i s being developed by the SZo Paulo State Government to finance the rehabilitation of historic centers. Santos and SZo Paulo have been selected for the first investments. The program will be financed with funds from the accumulated ICMS credit^.'^ There are an estimated US$1.3 billion in ICMS credits. These credits can be accessed directly by the 1,600 eligible companies for carrying out historic building restoration and can also be sold in the market. The buyer will commit to carrying out historic building restoration.

e) BusinesdTechnology Center; This program i s under preparation by the municipal government in a 40,000 m2 parcel that was recently transferred from the federal government to the municipal government as financial compensation for outstanding tax debts owed by the federal railroad. Petrobras i s buying 15,000 m2 to build a decentralized office with three towers for 6,000 employees. The remaining area will used by the existing Valongo train station (the first built in Brazil), which wil l be restored with funds from the ICMS credit program and by a technology center. The latter i s also part o f a joint municipal and state government program.

9. In February 2008, the federal government promoted the signature o f a land revitalization agreement between the Port Authority and the Santos Municipal Government aimed at the release of port areas no longer utilized for port operations. The objective o f this four-year agreement i s the joint preparation and implementation of a plan for the rehabilitation o f the port area situated close to the Valongo train ~ ta t i on '~ and i ts integration with the urban structure and other revitalization programs already in place. The municipal government is required to present a land use plan for the port area, a 1 km strip that belongs to the federal government. In order to prepare the plan, the municipal government requested technical support from the Bank and a specialized consultancy. The agreement opens a window of opportunity for local government participation in port development issues, and should be seen as a pilot for further development. The agreement i s not only for a transfer o f assets but an invitation to cooperate in the definition o f the city-port relationship.

l3 ICMS i s the most important state tax. An ICMS credit results from overcharging mechanisms in the export sector. l4 Valongo i s the first railway station in Brazil, currently dismantled and purchased by the Santos Municipal Government.

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10. A preliminary but well-detailed land use plan has been prepared. I t proposes the principal scope for the area, including a waterfront offering recreational alternatives, a cruise terminal, services for the area’s administration, services related to cultural activities, hotels, and residential alternatives. These uses would be closely integrated with the business and technology center, which i s within walking distance. Designing the solutions for this initiative requires several complex studies and subsequent managerial decisions.

1.1.3. Information Technology Program

11. Approximately one third of the city area already benefits from a high-end fiber optic network system implemented by the municipal government. The objective of this public investment i s to provide the municipal government with more powerfbl information technology services at lower costs. The investment made so far totals approximately US$3 million and serves the main municipal office buildings. Thus, most municipal staff and service departments are connected to the network. This has allowed the development o f a high-end e-government program. I t also supports a security camera system integrating police and the firefighting services, which has ensured live monitoring and prompt responses. The existing e-government and information technology system was developed by the Department of Municipal Modernization and Information Technology Management. The department, with approximately 90 professionals under a fixed-term contract modality, i s also responsible for the system’s operation and maintenance. In addition, the department provides a broad range o f services to the municipal government. One o f these services has achieved significant results -- the development and execution o f the information system for the property cadastre. Today, the municipality has a very efficient property cadastre information system that supports the local tax program and the enforcement o f urban regulations. The platform i s a geographic information system, several layers o f which are available to the public through the municipal website.

12. This activity include the development o f the Borrower’s information technology program, including: (i) development o f a public-private partnership arrangement for increasing the system’s efficiency and i ts operation and maintenance capacity; and (ii) expansion of the network in the Northwest Zone as part o f the large-scale municipal effort to improve urban services and standards in such neighborhood. This program will be implemented by the Municipal Government Secretariat, which i s in charge o f the existent large I T municipal program.

1.2. Enhancing Municipal Administrative Management Capacity

13. Municiual land ulanning and control mechanisms: This activity will strengthen the Borrower’s capacity for land management by complementing the ongoing modernization process introduced in the land cadastre mechanisms, including detailed mapping o f principal organizational and processing procedures, preparation o f recommendations for improvements, and training o f staff responsible for implementing the new procedures. This activity wil l be implemented by a joint group involving the municipal Planning, Government and Financing secretariats, through a signed framework agreement establishing a multisectoral task force to execute the project.

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14, Project management: This activity wil l support project management capacity, including monitoring and evaluation, auditing, financial management, procurement, and works supervision o f the Project. This activity wil l be executed by the Municipal Government Secretariat, which is responsible for the project coordination as defined in the signed framework agreement establishing the multisectoral task force to execute the project.

Component 2: Revitalization of the Northwest Zone and Adiacent Hillside

15. The component will be carried out in an integrated manner in the Northwest Zone of Santos, an area marked by a large concentration o f poor populations living in slums along the edge o f the island and by a large presence of stilt houses built over the canal that separates the island from the continental area. The area i s also affected by flooding due to an insufficient macro-drainage system.

16. In addition to the urgent need to address poverty and weakness in public services, the Northwest Zone plays an important role in Santos’ ongoing revitalization effort. The two other main areas o f the city (the Northeast Zone and downtown) are already undergoing a significant modernization process and the population density in these areas i s reaching the maximum allowed in the city’s Master Plan. The Northwest Zone, however, i s in the opposite situation -- private investment in the area i s scarce and population density i s well below the level prescribed in the city’s Master Plan. The Northwest Zone, therefore, represents the only opportunity for urban expansion on the island.

Subcomponent 2.1: Addressing Social Inequality

17. The component inc1,udes the construction o f basic urban services and resettlement housing.

18. Slum uunradinn and resettlement: This activity includes the provision of infrastructure in Villa Gilda in the Northwest Zone including, construction o f water and sanitation networks, and drainage systems, street opening and paving, installation o f public lighting and a gas pipes network, construction o f bicycle paths and recreational and park areas, construction of facilities for local commerce and public daycare and community centers, and restoration o f aquatic and riparian vegetation along the canal bordering Villa Gilda. I t will also finance the resettlement of families residing in st i l t houses built over the canal adjacent to Villa Gilda and construction o f housing units for the resettled families. The municipality i s already financing the execution o f the social activities required to inform the population and ensure their participation in the planning and execution phases, as well as providing social support for the families being resettled. These activities are coordinated and mostly executed by social workers that are municipal staff. The urban designs have also already been prepared and were financed by the municipal government. This activity will be carried out by the Municipality of Santos with the cooperation of the Baixada Santista housing company (COHAB), a legally autonomous agency, with financing from the Guarantor, under the terms o f a cooperation agreement to be entered into prior to the commencing implementation o f this activity. A l l safeguard requirement o f the project wil l be complied with respect to these activities financed with counterpart contributions. The

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training activities of the resettled families will be carried out directly by the Municipality of Santos.

19. Imurovements to the municipal job training urogram for low-income -families: This activity includes the rehabilitation o f decentralized municipal facilities which offer professional training courses for low-income families. This should contribute to the development of human capital within the region. Capacity building and training activities for the resettled families wil l be carried out directly by the Municipality o f Santos.

Subcomponent 2.2: Improving Public Services

20. the Infrastructure Secretariat under the coordination of the Government Secretariat.

This subcomponent will be implemented by the Municipality of Santos through

2 1. Storm drainage svstem imurovements: This activity includes the rehabilitation of existing canals, purchase and installation o f canal gates, pumping stations, and a centralized operational control system. The resulting decrease in incidents of flooding should increase the availability of developable land for investment, as well as enhance the flow of people and goods within the city. Pre-feasibility studies were carried out during project preparation.

22. Preventing risks of landslides in the hillside adjacent to the Northwest Zone: This activity includes preventive works, such as retaining walls and micro-drainage infrastructure, to avoid erosion caused by inadequate drainage in a hilly topography. I t will also finance the acquisition of vehicles to strengthen the monitoring of high-risk areas susceptible to unregulated occupation.

23. Increasing urban greening and amenities; This activity includes improvements to the Borrower’s Botanical Garden and planting o f street trees in the Northwest Zone, both as a means to promote tourism opportunities, as well as increasing the urban spaces available for absorbing rainwater, and reducing the storm water flow. The Botanical Garden i s the Northwest Zone’s main landmark, as it attracts visitors from other neighborhoods and municipalities and i s the principal recreational space in the area. The increase in the number o f street trees and green spaces wil l enhance the attractiveness of the urban area and hrther promote tourism opportunities in the region, as well as provide additional surface area for infiltration and absorption of rainwater, thus helping decrease the flow o f storm water into drainage systems.

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Annex 5: Project Costs

BRAZIL: Municipality of Santos Project: Santos Novos Tempos

Local Foreign Total

million million million Project Cost By Component and/or Activity US$ US% US$

Component 1. Municipal Management 7.0 0.0 7.0 Enhancement 1.1, Enhancing municipal management in local 1.5 0.0 1.5

economic development 1, l . l . Regional economic development study 0.3 0.0 0.3 1.1.2. City-port revitalization initiative 0.4 0.0 0.4 1.1.3. Information Technology Program 0.8 0.0 0.8

1 -2. Enhancing municipal management capacity 0.2 0.0 0.2 1.2.1. Municipal land planning and control mechanisms 0.2 0.0 0.2

1.3 Project management 5.3 0.0 5.3

Component 2. Revitalization o f the Northwest Zone of Santos and Adjacent Hillside 75.5 0.0 75.5 2.1. Addressing Social Inequality 33.9 33.9

2.1.1. Slum upgrading and resettlement in Vila 0.0 Gilda 33.6 0.0 33.6 2.1.2. Improvements to the municipal job training program for low-income families 0.3 0.0 0.3

2.2. Improving Public Services 41.6 41.6 2.2.1. Storm drainage system improvement 33.6 0.0 33.6

Adjacent to the Northwest Zone 6.4 0.0 6.4 2.2.3. Increasing urban greening amenities 3.6 0.0 1.6

2.2.2. Reducing risk o f landslides in the Hillside 0.0

Total Baseline Cost 82.5 0.0 82.5 Physical Contingencies 3.8 0.0 3.8 Price Contingencies 1.7 0.0 1.7

Total Project Costs' 88.0 0.0 88.0 Interest during construction

Front-end Fee 0.1 0.0 0.1 Total Financing Required 44.0 0.0 44.0

The total loan amount i s US$44million and the total counterpart fund amount i s US$44million.

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Annex 6: Implementation Arrangements

BRAZIL: Municipality o f Santos Project: Santos Novos Tempos

1. The project will be implemented by the Municipality o f Santos, which has identified the Secretariat o f Government as the project’s focal point for coordination purposes. In this capacity, the Secretariat o f Government will ensure the timely coordination o f project .activities, budget allocation, adoption o f Bank procurement rules, and financial management control. In addition, the Secretariat o f Government will act as the municipal representative for interacting with the Bank and processing loan management procedures. To perform these tasks, the Secretariat o f Government has already constituted a working group including representatives from the municipal secretariats involved in project implementation. This working group has the responsibility o f joint ly making project implementation decisions and ensuring that these measures will be undertaken by the respective municipal secretariat. The working group’s composition has been formally created by municipal decree. To provide support to the working group’s operations, a Project Coordination Unit (UGP) with three municipal staff members has been constituted and formally assigned to the Secretariat o f Government. N o t later than six months from the Effective Date, the UGP must be f i l ly staffed with personnel with experience and qualifications satisfactory to the Bank, including the following key staff: a coordinator and experts to handle the technical, procurement, financial management and safeguard aspects o f the Project.

2. The Secretariat o f Government, as the focal point for project coordination through the support o f an intra-municipal working group model, i s overseeing the project preparation phase and implementing a Japan Policy and Human Resources Development Fund (PRHD) grant for that purpose. Building on the Secretariat o f Government’s experience during the preparation phase, this arrangement avoids the creation o f a new entity within the municipality for implementing the project and ensures appropriate participation by the other departments involved and dissemination o f the project experience. To facilitate the adoption o f this model during project implementation, when project management requirements increase, the Secretariat o f Government will seek support from consultants who are experienced in Bank procurement and financial management procedures.

3. The slum upgrading and resettlement o f families in the Northwest zone o f Santos will be carried out by the Municipality o f Santos with the cooperation o f Comapanhia de Habitaqiio da Baixada Santista (COHAB), a legally autonomous agency, under the terms o f a cooperation agreement satisfactory to the Bank, which shall include, inter alia, the technical, institutional, and environmental and social safeguard arrangements a procedures for implement these activities.

4. The description o f responsibilities o f each municipal agency is: C iv i l works Secretariat (SEOSP) - technical responsibility over the execution o f the macro-drainage works; Housing Company (COHAB) - technical responsibility over the execution o f the slum upgrading, housing and resettlement activities; Environmental Secretariat (SEMAN) - operates the macro-drainage system; Social Assistance Secretariat (SEAS) - technical responsibility over j o b training activities; Government Secretariat (SGO) - overall project coordination responsibility and technical overseeing on the institutional capacity building activities; C iv i l Defense (Defensa Civil) - monitor the civ i l works execution.

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5. preparation, which will continue to be operational during project implementation.

The figure below illustrates the institutional arrangement put in place for project

World Bank

Finance

..................... ................ j Working Group arrangement to ~

I support project implementation: j j * Intra-institutional integration j j * Innovative technical issues j j Guidance on fiduciary aspects j I (FM, procurement) i Coordinated interaction with the j I ...............,...................., Bank

Secretariat of Government

(Project coordination)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Co-Executor Co-Executor Co-Executor Co-Executor Co-Executor j SEOSP COHAB-ST SEMAM SEAS

Component 2: Urban Revitalization of the Northwest

I Subcomponent 2.1: Addressing Social Inequalities

I I'

Subcomponent 1.1: Enhancing Municipal Management Capacity in Local Economic Development

7-i- Civil Defense

43

Annex 7: Financial Management and Disbursement Arrangements BRAZIL: Municipality of Santos Project: Santos Novos Tempos

Background

1. A Financial Management Assessment (FMA) o f the Santos Municipality Project, to be coordinated and substantially implemented by the Municipality o f Santos’ Secretariat o f Government, was undertaken in accordance with OP/BP 10.02 and the Financial Management (FM) Practice Manual (issued by the FM Sector Board in November 2005). The objective was to assess the Secretariat o f Government’s capability to effectively execute the financial management and monitoring o f this project financed by the World Bank (Bank).

Conclusions of the Assessment

3. The Borrower (Municipality o f Santos, SP), wi l l implement the US $ 88 million project through seven municipal secretariats (Civil Works, Planning, Environment, Social Assistance, PRODESAN (Information Technology Department), COHAB (Municipal Housing Department), and Government), under the coordination o f a working group (WG), within the Secretariat o f Government (SG). Project planning, budgeting, budget execution, and accounting will be decentralized to the participating entities, using the municipal financial I T systems. Budget consolidation and reporting wi l l be handled by the WG, using the municipal financial I T systems and receiving the assistance o f a private financial management firm. The current F M structure o f the SG has been assessed and considered well staffed with qualified professionals.

4. The Risk Assessment Matrix below presents the project’s potential F M risks. The residual overall FM risk associated with the project i s rated as moderate.

5 . During the F M assessment, the F M team provided orientation in FM and disbursement issues and helped the Secretariat o f Government to prepare an F M Action Plan to improve the identified weaknesses. The successful implementation o f the risk mitigation measures and the F M Action Plan wi l l further improve the project’s financial management arrangements and further decrease project risk.

Summary Project Description and Assessment of Financial Management Arrangements

6. As illustrated in the figure above, in Annex 6 (institutional arrangement), paragraph 5, the Borrower (Municipality o f Santos, SP) wil l implement the project through seven municipal secretariats: Civil Works, Planning, Environment, Social Assistance, PRODESAN (Information Technology Department), COHAB (Municipal Housing Department), and Government. The Secretariat o f Government (SG) wil l ensure timely coordination o f project activities, budget allocation, adoption o f Bank procurement rules, and financial management control. A Working Group (WG) has been established within the SG, including three municipal staff members formally appointed in the SG and representatives from the municipal secretariats involved in project implementation.

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7. This WG has the responsibility o f joint ly making project implementation decisions and ensuring that these measures are undertaken by the respective municipal secretariats. Indeed, strong coordination by the WG will ensure timely and integrated implementation o f project activities, under fiduciary and safeguard procedures acceptable to the Bank. The WG and the participating implementing entities will use the municipal IT systems for budgeting, accounting, and reporting.

8. While planning, budgeting and budget execution initiation will be responsibility of each implementing entity, the SG will proceed with budget consolidation and budget execution orders. SEFIN (Municipal Secretariat o f Economy and Finance) will be responsible for the supervision o f the entire project’s financial management and disbursement activities. SEFIN (already established and operational) will be in a position to provide satisfactory internal control in terms o f segregation o f duties, established FM capacity, supervision o f the use o f funds, training programs, and the (newly established and internally tested) municipal information system (SIFIM). Specifically, SEFIN’s accounting and financial management personnel would be assigned to the project and trained by the Bank in procurement and financial management for improved efficiency and faster project implementation. Moreover, when project management requirements increase, the SG will have support from consultants who are experts in Bank procurement and financial management procedures.

9. Although the WG has been officially established and has begun implementing a project preparation grant, the municipality has only limited experience with Bank-financed projects. The current FM structure o f the SG has been assessed and considered well staffed with qualified professionals. In order to further strengthen cross-team efficiency, the Under-Secretariat will assign a financial management specialistlcoordinator and a procurement specialistlcoordinator to support the coordination o f participating entities. The FM action plan would also strengthen the Municipality o f Santos’ P F M capabilities throughout the project.

Financial Risk Assessment

10. The Risk Assessment Matrix below presents the potential risks, mitigation measures, and residual risk for the program from a financial management perspective. The residual overall Financial Management risk associated with the project i s rated moderate, due to the Municipality o f Santos’ limited experience with Bank-financed projects, and other identified weaknesses. Improvement opportunities are included in the FM Action Plan.

1 1. The following would mitigate the identified risks: (a) increased inter-institutional coordination; (b) review o f the internal controls; (c) highly qualified professionals in key positions, including an FM coordinator (profiles in the Operational Manual); (d) assessment and improvement o f the reporting capacity o f IT systems; (e) internal audit training; ( f ) preparation o f an Operational Manual, as well as training and guidance from the FM, Disbursement, and Procurement teams; (g) close supervision by the Bank FM team, at least during the first year o f project implementation; and (h) implementation o f the agreed FM Action Plan.

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12. As indicated in the table below, the loan will finance the activities under sub-components 1.2 (b) and 11.2 (a) o f the project. The records will be kept o f the expenditures made under al l components, not only the sub-components financed by the Bank.

Category Amount of the Loan Percentage of Expenditures to be Allocated financed (expressed in Dollars) (inclusive of Taxes)

(1) Works, goods, and 43,890,000 100% consultants’ services for sub- components 1.2 (b) and 11.24a) of the Project

(2) Front-end Fee 1 10,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions

Amount due under Section 2.07 (c) of this Agreement

(3) Premia for Interest Rate Caps and Interest Rate Collars

TOTAL AMOUNT 44,000,000

0

i I I

Flow of Funds and Disbursement Arrangements

I

13. Flow of Funds: The f low o f funds design i s relatively simple, since the loan proceeds will be received in the Designated Account managed by the Municipal Secretariat o f Economy and Finance (SEFIN) and al l payments will be made by the SEFIN, following the Municipality o f Santos’ budget execution process.

14. The sources o f external financing (loan), and disbursements, as well as the local funds, will be managed by SEFIN. At SEFIN’s request, the funds would f low from the World Bank loan account to a designated account (denominated in Reais) in the Banco do B r a d in Santos - SP, in the name o f SEFIN. Bank funds will be transferred and pooled with counterpart funds in an operational account in the name o f SEFIN, in the same bank. At the request o f the Secretaria do Governo, SEFIN will make payments from the operational account for the procurement o f goods and services to all consultants, other service providers, suppliers, and contractors involved in project implementation.

15. If required, counterpart funds would be directly paid from the Municipal Treasury or from a designated counterpart account and monitored by the Working Group. The final f low o f funds design as confirmed during negotiations i s included in the project’s Operational Manual as shown below:

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World Bank Designated Account SEFAZ - Commercial Bank

Disbursements Santos made in reais (R$)

16. Disbursement Arrangements: Bank disbursements under the loan would be report-based (IFRs), advances, against projected expenditures. The quarterly reports wi l l show projected expenditures for the next calendar semester and actual program expenditures incurred during the preceding calendar quarter. The Withdrawal Application and supporting IFRs should be sent to the Bank no later than 45 days after the end o f each calendar quarter. They may be sent earlier to accelerate disbursements. During negotiations it was agreed that a retroactive financing wi l l be available up to an aggregate amount not to exceed US$8,800,000 equivalent for payments made under for Eligible Expenditures under the Project within twelve months prior to the Loan Agreement date but in no case prior to September 30,2009.

Counterpart Funds SEFAZ - Treasury

Santos (R$)

17. Satisfactory IT systems that wi l l produce the reports and staff technical capacity wi l l be necessary for timely disbursement and satisfactory flow o f funds. The key elements for successful implementation o f report-based disbursements are: 1) the ability to make projections o f cash flow requirements; 2 ) synchronization with annual operating plans (PT-Programa de Trabalho [Work Program]) and procurement plans; and 3) finalization o f inter-institutional arrangements to ensure: (i) accountability at the different project levels, and (ii) timely transfers o f funds to the designated and operational accounts.

Project Account SEFAZ - Commercial Bank

18. Funds wi l l be deposited into the designated account as advances and will follow the Bank's disbursement operational policies and procedures. After IFR analysis by an FMS and TTL approval, the Bank will deposit into the designated account the amount required to finance eligible expenditures during the next calendar quarter.

Santos (R$)

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by IFR Payments for Comp. 1 & 2

Providers of goods and services

- Implementing Goods and Services a Agencies

19. The budgeting process, which i s necessary for project implementation and disbursements, wi l l use a bottom-up approach, while the final budget would have to be consolidated by the UGP before final approval i s received from the Municipality o f Santos. The municipality’s engagement in the availability o f counterpart funds or counterpart operations (according to the final agreement with the Bank), as well as engagement in the priority of project activities in the municipal budget, would be a guarantee for the accuracy and timeliness o f project implementation.

Financial Reporting

20. The format o f the project’s interim financial reports (IFRs) wi l l follow the format o f existing government reporting, to the extent possible. The ability o f the Secretariat o f Finance (Accounting Department) to generate them has been verified. However, an appropriate format for the required reports has been agreed by negotiations, attached to the minutes o f negotiations, and annexed to the Operational Manual.

21. These reports may be adjusted during or after project preparation. The description o f the IFRs i s indicated below:

ZFR I - Sources and Uses o f Funds, by category, cumulative (project-to-date; year-to- date) and for the last calendar semester, and forecasts for the upcoming calendar semester (for disbursement purposes); and

ZFR 2 - Sources and Uses o f Funds by project components, cumulative (project-to-date; year-to-date) and for the period, showing budpeted amounts versus actual expenditures, (Le., documented expenditures), including a variance analysis.

22. “Standard” wording will be used for IFRs. The quarterly IFRs would be submitted to the Bank no later than 45 days after the end o f each six month period.

Accounting Policies and Procedures

23. The Municipality o f Santos’ accounting system wi l l be used to record loan proceeds. Loan proceeds transferred to the SEFIN designated account would immediately be recorded and accounted under the budgetary code for receipt o f external or foreign fundinghancing sources.

24. All project budgeting and accounting transactions wi l l utilize the municipal financial I T systems and therefore all transactions wi l l be run through the public accounting system SIFIM, while for reporting wi l l be used the CONAM. All payments wi l l follow the official commitment (empenho) and payment (liquidayrlb) routine. The official commitment functions wi l l be conducted by the Administration and Finance Department o f each spending entity or level o f government, while the final payments wi l l be accounted and made by SEFIN. Individual project transactions are usually processed through a Work Plan (Program de Trabalho-PT), which i s a cost center specifically designated for the given project, and which wi l l be utilized by the Municipality o f Santos’ participating entities. The accounting function wi l l be handled by SEFIN, ensuring that the chart o f accounts has attributed adequate charge codes to the upcoming expenses. Each payment wi l l be registered in SIFIM, identifying the project, source o f financing,

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disbursement category, components and activities agreed during project preparation and reflected in the Legal Agreement.

25, Project financial statements will be prepared quarterly, utilizing cash-basis accounting. These statements wi l l be prepared in accordance with Brazilian legislation (Law 4.320) and the Municipality o f Santos’ accounting rules and procedures.

26. The project’s Operational Manual wi l l contain detailed procedures and guidelines for disbursements, payments, approvals, commitments, and payments.

Information Systems

27. Since mid ,2006, the Municipality o f Santos i s using CONAM, a new information system, which allows for the recording o f detailed accounting information. This system will be used by SEFIN, the implementing entities, and the WG, for budget preparation and consolidation, accounting, monitoring, reporting, and disbursements, since i t s major capacities relate to the following:

0 ability to produce Intermediate Financial Reports (IFRs) to support project management and disbursements; an adequate monitoring mechanism for overseeing the financial operations o f participating entities;

0 record keeping and filing with no fragments for auditing the trail o f transactions; and 0 synchronization among project planning, execution o f payments, and authorization o f

withdrawal application requests submitted to the Bank.

Safeguarding of Assets

28. Based on project design, investment in fixed assets i s expected to be high on behalf o f the Municipality o f Santos. SEFIN will be responsible for the management o f assets under control, duly codified and identified as project assets, partially or totally financed by the IBRD loan.

Oversight, Control, and Audit

29. Internal Audit: Project transactions wi l l be subject to post review by the TCE (annually) and the Internal Audit Department o f the Municipality o f Santos (the Controladoria Municipal), created during the second semester o f 2006. This department i s independent and reports directly to the Municipality’s Judiciary. However, as the rate o f implementation increases, the UGP wi l l need to ensure that i t s own internal control structure i s sufficiently strong, and the F M function i s adequately staffed with professionals who are familiar with Bank policies and procedures, to: (i) avoid ineligible expenses and delays in the flows o f funds and project implementation, (ii) safeguard project assets, and (iii) avoid misuse o f funds.

30. External Audit: The fourth-quarter report (IFR) that wi l l be used for disbursements will also contain the project’s annual financial statements and include notes on financial statements and disbursement indicators. The independent auditors should have access to all supporting records and make on-site examinations. According to the audit TORS approved by the Bank, the auditors

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will be required to: (i) issue a single opinion on the project’s financial statements, including fulfillment o f the covenant in the Loan Agreement, within six months after the end o f the fiscal year, and (ii) perform at least one interim inspection per year in order to promptly identify areas that require the attention o f project management. These reviews will identify problems related to accounting and/or internal controls. After each interim visit a memorandum on internal controls (management letter) should be produced to ensure that corrective actions are addressed in a timely manner. A copy o f the memorandum will be sent to the Bank by year end.

Municipal decree

WG

3 1. “Standard” wording will be used for project audits. The annual audit reports will be furnished to the Bank no later than six months after the end o f each year.

Prior to PHRD Accomplished signature

During appraisal Accomplished and Inclusion in Operational Manual

Financial Management Supervision during Implementation 32. During the f i rst year o f implementation, Bank FM supervision will be carried out at least twice, considering the overall risk profile. Supervisions will review actions by the Municipality o f Santos that have been agreed in signed aide-memoirs, the FM Action Plan, and other controls and transactions, as appropriate. This review will be complemented by desk reviews o f the quarterly IFRs and annual audit reports. Thereafter, as long as the FM risk i s deemed to be l o w to moderate, the supervision frequency may be reduced to an annual mission, with the exception o f the period prior to project closing which will be monitored closely to ensure that expenditures are not incurred after the closing date. Interim visits may also be needed to fol low up on desk reviews.

Financial Management Action Plan

33. The following FM Action Plan was agreed during the FMA with the project team.

WG

Activity

Operational Manual Prior to PHRD Accomplished

Legal Formal creation o f the WG

Municipality o f Santos

Flow of Funds Flow o f funds design

signature Prior to signature Accomplished

Organization and Staffing UGP Organization Chart

Formal nomination o f the Project Preparation Coordinator Three WG staff members: I Coordinator 2 Administrative Officers Plus: 1 dedicated accountant in SEFIN 1 dedicated procurement specialist in SEAD

Procurement: B Guidelines for the project

Entity 1 Target Date 1 Status ResDonsible

WG I Inclusion in I Accomplished

July 15,2007 July 30, 2007

Accomplished

WE3 I I

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0 Training for the: 1. Secretaria de Administrap70 (Secretariat of

2. Controladoria 3. Procuradoria Geral do Munic@io

Administration)-SEAD

Disbursements: Disbursements Manual for the project m: Introduction to Bank Operations and FM Training Operational Manual Submission o f draft manual to Bank for review, including institutional arrangements, flow o f funds design, staff functions, accounting policies and procedures, basis o f accounting, chart of accounts tailored to include project components, disbursement categories and financing source, internal controls, separation o f duties, fixed assets, and records management procedures. External Audit Draft audit TORS sent to Bank for approval

Inclusion in Operational Manual

Within three (3) months after effectiveness

Prior to Negotiations

Appointment o f external auditors

Accomplished

Accomplished

Internal Controls TCE 2006 Audit Report to the Bank

Evaluate the possibility o f implementing an electronic internal control mechanism

Safeguard over Assets (physical and information) Implementation of Fixed Asset Policies and Procedures including physical inventories, storage/transfer/distribution/retirements o f assets, etc.

Implementation o f Records Management System

During project preparation

Financial Reporting and Monitoring Submission o f IFR format to the Bank

Accomplished Integrated Financial Management System Evaluate the possibility o f preparing a module for the Drenaration o f the IFRs

WB

WB

WG/SEFIN

WG

WG

UGP

UGP

WG

UGP

~

WG

UGP

Prepare until July I Accomplished I 2009

Accomplished

1 Prior to signature

Within three (3) months after effectiveness

When available

During project preparation

Accomplished

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Annex 8: Procurement Arrangements

BRAZIL: Municipality of Santos Project: Santos Novos Tempos

I Works

A) General

ICB NCB Shopping ? 10 million < 10 million < 350,000

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004 and revised October 2006, “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure categories i s described below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank’s project team in the Procurement Plan. The Procurement Plan wil l be updated at least annually or as required to reflect actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works: Works procured under this project would include: macro- drainage implementation and road system rehabilitation. Other smaller works such as urbanization o f public areas (urban equipment) and refurbishment o f small buildings would also be expected.

3. Bank’s SBD for all ICBs.

Procurement Methods for Works: The procurement would be carried out using the

4. Under NCB, only the competitive procurement methods defined in Brazilian Law 8.666 o f June 21, 1993 and i t s amendments and the Preg6o EletrGnico (Electronic Reverse Auction) defined in Brazilian Law 10.520 o f July 17,2002 could be used. The other methods would not be acceptable. Provisions o f the Bank’s Guidelines would apply to all other aspects o f the procurement carried out following NCB procedures. SEAIN’s SBD, agreed with the Bank, would be used for the methods under Law 8.666 and Banco do Brasil’s SBD, agreed with the Bank, would be used for the Preg6o EletrGnico.

5. Special Provision for NCB: “Bidding documents shall be acceptable to the Bank.”

6. o f par. 3.6 o f the Guidelines may be procured on a direct contract basis.

For small-value contracts, shopping would be used. Contracts that meet the requirements

Procurement Methods and Thresholds (in US$)

7. Selection o f Consultants: Consulting services by f i rms required for the project would include: preparation o f the municipal strategic development plan, Santos’ Baixada Santista

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Metropolitan Transport System insertion plan, preparation o f an administrative and financial modernization program, technical assistance for project implementation, preparation o f a land and urban regularization project, preparation o f professional qualification programs, preparation o f a macro-drainage project design, works supervision, and auditing o f the project’s financial statements, Short l is ts o f consultants for services estimated to cost less than $500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

Contracts Works

8 . Consultant Selection Methods: QCBS would be the default method for the selection o f f irms, but QBS, LCS, FBS, CQ, and SSS could also be used if the requirements o f the guidelines are met. Individual consultants may also be required for project implementation. Any single source o f consultants would require the Bank’s prior review.

Number Method Review Bidding Documents 1 ICB Prior Bank SBD

Summary of contracts, methods, prior reviews and bidding documents:

2 1

QCBS Prior Bank SRFP

QBS, LCS, FBS Prior Bank SRFP Consulting Services

B. Assessment o f the agency’s capacity to implement procurement

9. Procurement activities will be carried out by a Special Bidding Committee created under the municipality’s Procurement and Supply Department (DELIS). DELIS i s staffed by over thirty professionals. The Special Bidding Committee will be staffed by five procurement officers.

10. An assessment o f the capacity o f DELIS to implement procurement actions for the project was carried out in April 2008. The assessment reviewed the organizational structure for implementing the project and the interaction between the project staff responsible for procurement and the ministry’s relevant central unit for administration and finance.

1 1. The issuedrisks concerning the procurement component for project implementation have been identified and include lack o f familiarity with the Bank’s procurement rules and procedures. The agreed corrective measures include setting up a Special Bidding Committee, hiring a procurement consultant, and training the committee’s members.

12. The overall project risk for procurement i s low.

C. Procurement Plan

13. At appraisal, the Borrower developed a Procurement Plan for project implementation which provides the basis for the procurement methods. The Borrower and the task team reached agreement on this plan on October 1, 2009. I t i s also be available in the project’s database and on the Bank’s external website. The Procurement Plan will be updated in agreement with the project

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team annually or as required to reflect actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

14. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment o f DELIS has recommended that annual supervision missions visit the field to carry out a post review o f procurement actions.

E. Details o f the Procurement Arrangement involving International Competition

15. Works.

(a) List o f contract packages that wi l l be procured following ICB and direct contracting:

Procurement Method

ICB

Contract (Description)

works

P-Q Domestic Review Expected Preference by Bank Bid (yesho) (Prior/Post) Opening

No N o Prior July 2009 Date

Estimated cost

Estimated cost

33,120,358

Selection Method -

Technical

(b) ICB contracts estimated to cost above US$10,000,000 per contract and all direct contracting wi l l be subject to prior review by the Bank.

(Prior/Post) 1,800,000 QCBS Prior November 2009

16. Consulting Services

Assistance for project operation Works Suoervision

(a) List o f consulting assignments with short l i s t o f international f i rms.

3,000,000 QCBS Prior November 2009

Description of Assignment

Review by Bank

Expected Bid Submission Date

(b) Consultancy services estimated to cost above US$lOO,OOO per contract and all single-source selection o f consultants (f i rms) w i l l be subject to prior review by the Bank.

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(c) Short l is ts composed entirely of national consultants: Short l i s ts o f consultants for services estimated to cost less than US$500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

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Annex 9: Economic and Financial Analysis BRAZIL: Municipality of Santos Project: Santos Novos Tempos

The Economic Analysis in its entirety is available in the projectJiles. A summary of the analysis is provided below.

1. Improving the standard o f living in the Northeast Zone o f Santos requires urban infrastructure improvements, drainage system enhancements, social actions, and the construction o f housing units for families in areas that are not appropriate for development. If the Project focuses on raising the standard o f urban services in the Northeast Zone, the resulting increase in urban expansion alternatives in Santos would be considered a positive externality o f this intervention.

2. The cost-benefit analysis conducted for the Project analyzed the urban infrastructure investments and estimated benefits from: (i) the macro-drainage system; (ii) slum upgrading; (iii) works for addressing the geological instability in hill areas; and (iv) general urban improvements in the Northeast Zone.

Cost-Benefit Analysis

3. A detailed economic assessment with a focus on urbanization investments was undertaken for this US$SS mi l l ion Project, o f which the proposed Bank loan corresponds to 50% (US$44 million). Project costs associated with al l the components were included in the analysis, as were returns to the investment in institutional development, community participation, and education, as these elements are considered fundamental for service sustainability and are ultimately expressed through improved access to urban services. However, not a l l o f the expected economic benefits were quantified.

4. To determine the net incremental costs and benefits, "with" and "without" Project scenarios were constructed. On the basis o f these scenarios, the net incremental financial benefits and costs o f the proposed investment programs were assessed, and were then adjusted to account for the impact o f taxes, subsidies, and externalities to arrive at the economic f low o f costs and benefits. The cash flows were discounted using a discount rate o f 12 percent, which i s estimated to be a proxy o f Brazil's opportunity cost o f capital. The following sections provide more detailed information on the estimation o f economic benefits and costs. The complete report, in Portuguese, i s located in the Project files.

Economic Benefits

5. The Project's main benefits include: urban and environmental rehabilitation o f areas currently occupied by slums; new housing units for low-income families; property value appreciation in the Northwest Zone, especially in the area targeted for urban upgrading; rehabilitation o f existing housing units; generation o f jobs and income for the low-income population; revitalization o f the Dique da Vi la Gilda area; improved access to public services; reduced levels o f crime in the region; resettlement o f individuals from areas o f high personal and environmental risk; property value appreciation due to reduced geotechnical risk in the Morros area; property value

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appreciation due to improvements in the macro-drainage system; reduction in the maintenance and operation costs o f the existing macro-drainage system; reduction in health costs related to waterborne illnesses, infant mortality, and geological accidents; reduction in private losses due to flooding; facilitation o f urban densification, which i s currently unfeasible due to flooding conditions; gains in working hours for the residents o f the Northwest Zone due to uninterrupted public transport during storm events and high tides; rehabilitation and improvements to recreational squares and parks; improvements to the urban and environmental landscape; and improvements to the city's botanical garden.

6. To estimate the economic benefits o f access to improved urban services in the Northeast Zone, a hedonic pricing methodology was used. The hedonic price function i s based on the housing market in which transactions can be observed. The welfare significance o f the hedonic price function comes from the fact that people are receiving the marginal value o f particular attributes (such as access to services, distance to center, etc.) that are not sold separately in the market, but are embodied in the house and reflected in housing values.

7. The model explains housing price per square meter using the following variables: distance to the port (which reflects distance to city center); house construction area; income o f head o f households; habita (a variable from 0-4 inversely related to proximity to and influence by slums); and access (a variable from 1-3 according to level o f infrastructure access). A house price sample o f over 500 houses was used for 2008. With R2 0.53, all the variables except for the distance to the port are statistically significant at 95% confidence level. The coefficients o f the model are applied to the project's planned improvements for slum upgrading and infrastructure improvements, to derive the economic benefits o f the project.

Economic Costs

8. Economic costs o f the Project include capital costs, operation and maintenance costs, macro- drainage, rehabilitation, resettlement, environmental mitigation and contingencies. For each component, the costs o f complementary actions necessary to derive the expected benefits and sustainability levels targeted were considered. It was deemed necessary to include these additional costs in order to assume that the expected benefits o f the Project will actually be realized. For the estimation o f economic costs, specific adjustments were made to deduct embedded taxes in material and labor from investment, operation and maintenance costs. The following conversion factors were used in the analysis: skilled labor: 0.732; unskilled labor: 0.272; local materials and equipment: 0.887. Once al l financial costs were converted into economic costs, incremental costs were calculated based on the comparison o f the "with" and "without" Project scenarios. Although total Project costs were used in the cost-benefit analysis, economic benefits were only quantified for investments in the Improving Public Services component, corresponding to the urban upgrading and sanitation sub-components. The components analyzed represent 89% o f total Project cost.

Results of the Cost-Benefit Analysis

9. Results from the cost-benefit analysis - which measured benefits of: (i) urban upgrading, through increases in property values based on the hedonic price function; (ii) sanitation,

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including the annual investments in economic prices o f al l interventions under this sub- component and al l the resource savings to the economy associated to the reduction in macro- drainage operation and maintenance; and (iii) aggregated results f rom the urban upgrading and the sanitation components - showed that the analyzed intervention yields a positive return. The project i s economically viable with an overall economic internal rate o f return o f 20.8% and a net present value o f US$12.7 million.

Sensitivity and Risk Analyses

10. The sensibility analysis demonstrated the project feasibility in conditions o f reduced benefits and costs increases.

1 1. The results show that the benefits would need to be 20% less or the costs 25% higher in order for the rate o f return to fal l below 12%. In an intermediate situation, the benefits could be reduced by 10% and, simultaneously, the costs increased by 12% so that the rate o f return is equal to 12%.

12. The graphic below shows that any combination o f reductions in benefits or increases in costs located inside the shaded area result in rates o f return equal to or greater than 12%, thereby reflecting the margin for error for the outcomes o f the Project.

Figure 1: Sensitivity of the Economic Return for the Santos Novos Tempos Project

Sensitivity Analysis - Consolidated

1 30% I

-20%,

25% 20% 15% 10% 5% 0% -5%

, I -10% I

-30% -25% -20% -15% -10% -5% 0%

BENEFITS VARIATION

I -e Sensitivity

Sensitivity and Risk Analyses Methodology 13. The risk analysis was carried out by using a Monte Carlo and Latin Hypercub methodology. The key input variables for the cash flow model, on the side o f benefits as well as investment and operation and maintenance costs, were attributed an associated distribution probability and a corresponding parameter o f average and dispersion. The model was developed using the @Risk tool, and the distribution o f probabilities associated to the parameters o f attractiveness o f the project (NPV and IRR) were obtained.

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14. The table below presents the standards o f distribution o f the key variables model.

BASE STANDARD AVERAGE TYPE NUMBER DEVIATION Variable

BENEFITS Urban Upgrading 1 Normal 1 0.294 Drainage 1 Normal 1 0.408 COSTS

MAX MIN

Investments in Urban Upgrading Investments in Drainage Slums Area O&M Drainaae O&M

15. To measure the benefits from the urban upgradinghesettlement and the macro-drainage system normal distribution with variable coefficients obtained from the respective hedonic functions were used. In regard to costs, investment costs as well as operation and maintenance costs were entered into an asymmetrical triangular distribution varying between - 10% and + 15%. The resulting variables were the NPV and IRR.

1.017 Triangular 1 0.9 1.15

1.017 Triangular 1 0.9 1.15

1.017 Triangular 1 0.9 1.15 1.01 7 Trianaular 1 0.9 1.15

16. To ensure convergence o f the statistics with the N P V and IRR, the Latin Hypercub methodology was used, which represents an improvement over the Monte Carlo method once the random values are generated by the distribution o f input variables, thus increasing the efficiency o f the model.

Figure 2: Distribution of NPV Simulations using the

Latin Hvuercub Method

17. The results obtained for the NPV and IRR are presented in the figures below.

Figure 3: Distribution of IRR Simulations

Distribution for VPL 12%/F29 I Distribution for TIRIB32

40 -30 -20 -10 0 10 20 30 40 50 60 70

Values in Thousands

I -011 3687 -16,7611 4401 14

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18. Therefore, it follows that the resulting distribution values approach a normal curve with a 95% probability o f being in the range of:

NPV => -US$18.63 million and US$41.38 million

IRR => -0.1 1% and 35.92%

In other words, the results obtained demonstrate that there i s a 77.45% chance for the project to achieve the minimum profitability fixed at N e t Present Value (NPV) 2 0, and 80% probability o f the project achieving an annual IRR o f 2 12%.

19. A regression analysis o f the results obtained against the input variables would determine which variables most influence the results, identifying, therefore, the main sources o f risk for the Project. The results o f this analysis are shown in Figures 4 and 5 below.

Figure 4: Results of the Regression Analysis on Sensitivity of Benefits for NPV

Regression Sensitivity for VPL 12%/F29

I Slum benefitlB5

Slum drainagdB8

Slum investmentlB7 I I

-,w1 Drainage O&IWB10 I I I I I I I 1 l I l l I l "

-1 4,75 4 ,5 4,25 0 0,25 0,5 0,75 1

Std b Coefficients

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Figure 5: Results of the Regression Analysis on Sensitivity of Benefits for IRR

Regression Sensitivity for TIR/B32

I

B

Slum benefiVB5

I Draina e benefiVB6

I I

Slum drainagdB8

Std b Coefficients

20. The regression carried out confirmed that the urban land value increase achieved by providing urban infrastructure and services to the slums, combined with the required resettlement, i s the variable that most affects the results. The second largest impact i s achieved through investments to improve the drainage system.

2 1. In regard to variable that estimate benefits, i t should be noted that the variation coefficient obtained for the variable themselves are quite high. However, recent project evaluations indicate that the provision o f infrastructure has a significant impact on benefiting proper tie^'^. There i s also empirical evidence that there i s a positive impact on property values as a result o f investments in slums.I6

22. Thus, the risk analysis confirmed the results o f the feasibility analysis, and indicated that the intervention i s economically viable and the risks are controllable.

Financial Analysis

23. Santos had a better fiscal performance than national average and equivalent municipalities during 2002-05. Compared to these averages, Santos experienced higher positive primary surpluses, lower net debt services, and higher positive surpluses after fulfilling i t s debt obligations. Santos showed financial capacity to expand i t s investment, based on a significant proportion on total revenue o f i t s tax collection. However, despite these favorable factors, attention should be paid to i t s prospective social security expenditures and i t s debt dynamics.

24. Santos maintained high levels o f primary surpluses to net current revenue and i t s net current balances were able to finance non-financial capital expenditure plus financial obligations during

'' IBRD/IPEA/IPPUC. Urban Land Market Analysis in Curitiba: Final Draft in Analysis of Urban Land Markets in Brazilian Metropoles, November 2003. l 6 BRAKARTZ, J., GREENE, M. and ROJAS, E. - Cities for All: Recent Experiences with Neighborhood Upgrading. Washington, DC, USA: Inter-American Development Bank. 2002.

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the 2002-2006 period. Santos’ own tax revenue accounted for 53% o f total revenue expansion and current revenues grew at higher rates than expenditures.

25. As net consolidated debt to net current revenue i s well below the FRL ceiling, Santos has space for further indebtedness o f R$ 721 mi l l ion o f 2006 Reais. Furthermore, substantial current revenue resulting from its own tax base and state transfers, together with the l o w level o f indebtedness and actual service obligations, suggests that Santos has sufficient capacity to meet potential higher debt service obligations.

26. The prospect o f sustained growth o f the Brazilian economy assures that current revenues will be expanded at significant growth rates and Santos’ healthy fiscal situation will be maintained, financing most o f i t s investment and meeting its obligation under the Fiscal Responsibility Law.

27. Fiscal projections assumed a strong investment expansion above the disbursements associated with the Bank loan. Positive net current balances would finance investment expansion, consolidated debt reduction and asset accumulation. At the end o f the projection period, Santos would have better financial ratios than today, which also would be well below FRL’s ceiling. As a result o f the base case projections, it i s possible to state that the Bank loan and i t s associated investments will not compromise the financial sustainability o f Santos’ finances.

28. During the 2007-18 period, Santos will be able to face negative shocks maintaining i t s projected investment program with new indebtedness. However, the municipality would also be able to face negative situations with a reasonable combination o f new indebtedness, minor investment reductions and some control o f other current expenditures due to its solid present fiscal situation. Santos municipality will have ample room to address negative shocks, meeting i t s financial obligations and without infringing the FRL’s ceilings.

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Annex 10: Safeguards Policy Issues BRAZIL: Municipality of Santos Project: Santos Novos Tempos ’

1. The objective of the Santos Project i s to enhance the management capacity o f the Santos Municipal Government for local economic development and to improve public services in the Northwest Zone o f the Municipality o f Santos. The targeted project area for the proposed investments in public services-the Northwest Zone-largely concentrates the majority o f poverty and deficiencies in public services in the municipality. This project i s expected to have mostly positive environmental impacts on the Municipality o f Santos and surrounding areas as it wi l l finance investments aimed at improving existing inadequate environmental conditions, especially through implementation o f better wastewater and solid waste collection services and rehabilitation o f degraded mangrove areas, as well as contribute to more sustainable future economic development through the elaboration o f a Strategic Environmental Study focused on the Baixada Santista region.

2. This Annex provides information on the Safeguards Policies triggered by the project, safeguard-related risks and/or impacts identified through studies and assessments, the measures to be taken to address these risks, and procedures to ensure that the policies are carried out during project implementation.

Environmental Assessment (OP 4.01)

3. The project i s classified as Category A, requiring a comprehensive Environmental Impact Assessment (EIA). In accordance with OP 4.01, the EIA was conducted by the borrower, with support from a consulting firm and submitted to a public consultation on October 10, 2008. The EIA evaluates with- and without-project scenarios, identifies potential direct and indirect environmental impacts associated with the project and other alternatives, develops mechanisms and measures to avoid, minimize, and/or mitigate negative impacts, and presents an Environmental Management Plan with specific activities, budgets, and responsibilities to ensure the implementation o f identified mitigation measures.

4. In accordance with the Bank’s Information Disclosure Policy (BP 17-50), copies o f the EIA report (in Portuguese with an English-language summary) are available for public viewing at the office o f the Secretariat o f Government, the project’s coordinating agency. A copy o f a draft EIA and Executive Summary was also forwarded to the Bank’s InfoShop on August 15, 2008 and disclosed in country on October 3, 2008. Key findings and recommendations from the report are reflected in the project design and summarized in this Annex. Information on the public consultation process carried out to discuss and elicit feedback on the TORS for the EIA, and on the draft EIA, i s provided later in this Annex.

5. The EIA found that the range o f potential negative environmental impacts relates primarily to investments in flood control and drainage, as well as stabilization o f high risk areas in the hil ly part o f the island, and would be mostly localized and temporary while construction activities are going on. Overall, the proposed project i s expected to have a highly positive impact from an environmental standpoint. I t would improve the environmental quality o f the Northwest Zone’s urban wetlands and waterways through the implementation o f improved flood control

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mechanisms, restoration and protection o f the natural hydrological conditions o f the S8o Jorge River, improvements in quality o f the water bodies (rivers and estuary) through the removal o f irregular untreated wastewater discharge and solid waste disposal from the informal settlements (mostly composed o f st i l t houses), and by promoting the integration o f environmental concerns in long-term municipal development planning. Moreover, project-supported training activities targeting regulators, planners, decision-makers, and stakeholders would induce a series o f behavioral changes among urban residents, which would be expected to bring about positive changes for the environment.

Climate Change Assessment

6. The potential impacts o f climate change were assessed and incorporated in the project design. The information on potential impacts was drawn from the studies carried out by the International Panel on Climate Change (IPCC). These studies anticipate potentially more intense flooding events in lower areas caused by a likely increase in the sea level, ranging from 0.09 m to 0.88 m in the next 100 years (until 2 100).

7 . The expected sea level increase was taken into consideration in the macro-drainage modeling carried out for the Northwest Zone. The same precaution was taken for conceiving the operational procedures, which have been corrected to respond properly to new climate scenarios. The technical alternative selected, the solution designed, and the operational procedures to be adopted take into account the potential climate changes impacts.

Positive Environmental Impacts

8. Flood Control and Drainage. Poor drainage and flooding within the Northwest Zone are the result o f insufficient public investments in macro-drainage, poor urban planning, the unregulated occupation o f floodplain areas, inappropriate disposal o f solid waste, and deterioration o f aquatic and riparian environments, al l o f which have led to high levels and rates o f sediment and garbage accumulation in the natural drainage as well as in man-made drainage canals. Currently, the Northwest Zone i s subjected to an average o f five annual f lood events during times o f very high, in addition to other floods related to high storm events. The worst flood events take place when high tides are combined with high rainfall, especially during the summer rainy season, causing significant economic damage and negative social impacts, including exposure o f the population to highly polluted waters and associated water borne diseases.

The region has a macro-drainage system that does not meet the required urban service standards. The project will bring investments to the flood-prone housing settlements which are among the poorest in Santos and include st i l t houses built over the waterways. The project will finance hydraulic improvements through the removal o f trash throughout al l urban water bodies, the removal o f s i l t build-up in constrained urbanized areas, and the installation o f modern flood gates and pumping stations to regulate water f low in the event o f intense rains and high sea tides. Moreover, the project will finance the construction o f one f lood retention pond in a terrain with topography that i s greatly favorable for this use, thus increasing retention capacity to meet the needs during large summer rainfall events. The size o f the pond i s small (water depth less than 8

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meters in a 25-year storm event). The terrain i s privately owned and i s not being used because it retains storm water naturally, making it unsuitable for urban occupation.

9. Urban Environmental Management and Planning. The project will directly improve the environmental standards and management o f the Northwest Zone. This support will emphasize investments to create public recreational areas and promote the greening o f the urban space. Recreational areas will be created in strategic sites in the neighborhoods, including along water bodies. Some o f these areas already exist and wil l receive improvements such as recreational facilities for children. New areas will be created in spaces generated by the resettlement o f families living in slums that occupy sensitive environmental areas such as riverbanks. In addition to recreational alternatives, the vegetation in these areas will be restored and improved with the planting o f tree species native to the area in order to contribute to the restoration o f natural biodiversity, including mangrove habitats. The portion o f the slums not resettled will receive investments in urban layout and public services that will provide appropriate urban designs aimed at improving living conditions and preventing further expansion o f these informal settlements. One o f the urban works to be carried out in this area i s the construction o f a road between the remaining houses and the Bugres River, thus defining clear boundaries for the settlement. This road will allow for easy access to the houses in the near part o f the settlement, which will contribute to improve public safety through better access for f ire trucks and ambulances.

10. Biodiversity/Natural Habitats. The project i s expected to result in improvements to aquatic and riparian biodiversity within the Northwest Zone and in the mangrove complex. The project wil l promote the restoration o f habitat for wetland and non-wetland species alike through emphasis on the removal o f trash in the canals, the removal o f st i l t houses, the provision o f sewerage se rvkes to the remaining portion o f the slums, the creation o f urban parks, and the restoration o f aquatic and riparian vegetation along streams and mangrove vegetation along the canal. By promoting the preservation o f natural floodplains and drainage ways, the project will promote the maintenance o f existing aquatic and riparian habitats. Through the improvement o f water quality and removal o f solid waste, the project will result in direct improvements to aquatic and riparian habitats in the Northwest Zone. The creation o f urban parks along streams and the mangrove will result in long-term biodiversity benefits to local plant and wildlife.

Negative Environmental Impacts

11. The project will finance the construction o f infrastructure to improve the existing macro- drainage system, including: new floodgates, pumping stations, macro-drainage works, silt removal, provision o f public services in appropriate portions o f the slums, and urban and linear parks. The project will also support the stabilization o f high risk areas in the hi l ly part o f town. The construction o f this infrastructure could result in some limited and localized negative environmental impacts that would be mitigated through the implementation o f a series o f measures included in the project’s Environmental Management Plan (EMP), as described below.

12. Noise, Air and Water Quality. Infrastructure construction would likely result in localized short-term environmental impacts including dust, noise pollution, and erosion. Potential air- and water-quality impacts could result from the extraction and transport o f dredged sediments

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involved in drainage improvements. Moreover, the disposal o f dredged sediments could result in long-term negative water-quality impacts if not well managed. These issues will be handled through a series o f mitigation measures included in the EMP and described below.

1 3. Biodiversity/Natural Habitats. Infrastructure construction under the project could yield localized impacts to riparian habitats through the short-term removal o f non-native, invasive riparian vegetation. Riparian vegetation i s protected under Brazil’s National Environmental Law, but project activities to restore and expand native riparian vegetation (described in the E M P below) will more than mitigate this impact.

14. lnvoluntary Resettlement. Implementation o f project activities will result in the involuntary resettlement o f 1,100 families currently living in stilt houses built in slums that are deprived o f any public services due to the totally inappropriate environmental conditions o f the area occupied. The project’s Resettlement Plan, prepared in compliance with the Bank’s OP 4.12 and described below, outlines the steps that the project will take to resettle these families. COHAB owns the land where the resettlement housing complex will be located. C O H A B has already constructed several buildings for low-income families on this large piece o f land, which is provided with a full range o f urban services. The project also includes the acquisition o f titled land for the construction o f the flood retention pond.

Environmental Management Plan

15. The EA includes a series o f mitigation and an enhancement measures designed to ensure that the project minimizes any negative impacts while also enhancing the positive ones. These measures, together with the related budget (in US dollars), timetable, and institutional responsibilities, constitute the project’s EMP, which i s summarized below. The activities included in the EMP have been fully incorporated into project design.

16. Natural Habitat Restoration and Protection: Although the project i s expected to result in significant positive impacts for biodiversity and natural habitats, short-term impacts on riparian habitats will result from the undertaking o f drainage improvements. These impacts will be more than mitigated by project interventions to rehabilitate the water bodies in the Northwest Zone through the eradication and treatment o f pollution sources, the resettlement o f the population living over the mangroves, the creation o f urban parks, and the restoration o f mangrove vegetation. Specific environmental mitigation related to natural habitats includes the provision o f sewerage services to households in the sections o f the slums that have appropriate conditions for receiving basic infrastructure. Moreover, the urban drainage program will select alternatives that: (i) use adjacent spaces to create or augment urban green areas; (ii) maximize the preservation o f existing waterways and native riparian vegetation; and (iii) strengthen the protection o f existing protected areas to maximize the long-term sustainability o f water quality improvements. These activities will be the responsibility o f the project coordination unit and the technical units.

1 7. Environmental Construction Manual: The project has developed guidelines for all contractors, setting forth the environmental rules and procedures to be followed during construction. These guidelines will be appended to all project infrastructure-related contracts. The manual includes actions related to the environmental management and supervision o f works,

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the environmental requirements for contractors, environmental planning rules for construction and oversight o f works, including activities to minimize and mitigate construction-related impacts.

18. Urban improvements and Resettlement Action Plan: The project wi l l improve and provide full urban services to 2,400 fami l ies living in s lums and resettle 1,100 o f those. The families to be resettled are currently living in stilt houses in areas o f the slum unsuitable to receive urban services. In addition, the municipality wi l l acquire one privately owned land and turn i t into a flood-control retention pond. There in no one living in this area because it accumulates storm water naturally due to i t s topography. The project has established a Resettlement Action Plan (RAP) that offers compensatory alternatives to significantly improve the living conditions o f the resettled families. Moreover, the project wi l l provide technical support to strengthen the municipality’s social and legal capacity in order to ensure that comprehensive legal and social support i s available for resettled families throughout the entire resettlement process. The project’s monitoring and evaluation component wi l l also track the success o f resettlement and related institutional strengthening. These activities wi l l be implemented by COHAB.

19. Macro-drainage Operation and Flood Control Safety Procedures: The project includes the development and funding o f operational and safety procedures for the drainage system to be improved under the project. This includes a Central Operational Control Unit, routine operations, and safety procedures that wi l l be funded through the project. These activities wi l l be the responsibility o f the coordination unit and the Environmental Secretariat.

20. Transport and Disposal of Dredge Materials: The project will entail the removal, transport, and disposal o f dredged sediments from water courses and canals in the project area. The sediments will be disposed in the sanitary landfill currently used by the Municipality o f Santos. This i s a regular, privately owned sanitary landfill totally in compliance with state environmental legislation, and it i s regularly used for disposal o f river sediments. This activity has been authorized by the State Environmental Agency through environmental license #CADRI 18000723 issued in November 2006, which authorizes the disposal o f up to 30,000 tons o f river s i l t per year, enough to accommodate al l project-generated sediments.

Consultations Carried Out on Environmental and Resettlement Issues

21. A public consultation process was carried out, including consultation on the EA’S terms o f reference on March 25, 2008, and a public event sponsored by the Municipal Environmental Council, on October 10,2008, to discuss the draft EIA report.

POPULATION RESETTLEMENT

22. Project component that triggers population resettlement: The resettlement o f the population under the project i s part o f the component that funds the urbanization and land regularization o f slum areas in the Northwest Zone o f Santos. These investments wi l l bring improvements in urban design, basic services, recreation areas, environmental rehabilitation, and improvements in sanitation facilities. The component also includes activities to resettle families currently living in st i l t houses built over the mangroves. The fami l ies wi l l be resettled to new

67

housing units with urban services. The ultimate goal is to provide al l families currently living in slums with housing and public services similar to those available in other areas o f the city. This goal also includes transforming these irregular settlements into regular neighborhoods. Families remaining in the urbanized part o f the slum or resettlement housing units will be entitled to documentation o f land and building ownership. The macro-drainage investment will also trigger the Involuntary Resettlement policy because it requires the acquisition o f a private parcel o f land for use as a retention pond. This land will be purchased at i t s market value.

23. Resettlement characteristics: The slums in the Northwest Zone constitute two types of areas. In the elevated areas, the houses are built with cement and bricks above stable soil. In the lower areas, the houses are extremely precarious and built with provisional materials such as thin slabs o f wood. These are st i l t houses built over the canal. There i s no soil underneath, only water, raw sewage, and solid waste. During high sea tides, water invades the houses, bringing insects, rodents, and reptiles. When flooding i s severe, many houses collapse. The only alternative for families living in these unstable structures i s to resettle them in adequate housing where urban services are provided. The option o f landfill ing beneath the houses, in order to create soil where infrastructure would be constructed, i s not acceptable to the State Environmental Agency or by the Office o f the Attorney General. In addition, this, would not comply with urban regulations. The project includes investments to carry out urbanization works for approximately 2,400 families located in the slum known as Vi la Gilda I and 11. Based on the preliminary engineering designs, it i s estimated that approximately hal f o f these families (1,100) will be resettled. The other half, who will remain in the area, will receive investments that will provide the area with urban services.

24. The objectives for the resettlement are: (i) to improve the general quality o f l i fe o f the resettled population currently living in st i l t houses in V i l a Gilda; and (ii) to allow Vi la Gilda to be transformed into a regular neighborhood with quality urban services.

25. Socioeconomic characteristics o f the population to be resettled: The houses in Vi la Gilda were first built in these slums areas over forty years ago. Slum formations became more evident about two decades later, when the density o f the occupation rapidly increased and forced the population to expand and build houses over the water. The houses are totally irregular and lack any documentation. Approximately 50% o f the houses are built with slabs o f wood over the water, and there i s a high frequency o f fires and collapsed houses due to the rotting wooden pillars o f s t i l t houses. Because o f their location, no formal urban services are available. Water and electricity are illegally connected, and the illegal connection is often facilitated by a neighbor located on a main street where formal services are available and charged. The service i s formally charged on the basis o f a fee structure and the families who receive illegal service pay the neighbor who has allowed them to use an illegal connection. Only 2.7% o f households have more than one family in the residence. Nearly ha l f o f households consist o f a maximum o f three people, although about 38% o f households have up to eight members. Residents o f the area are very poor, and the average household income for the population i s 1 to 3 minimum salaries (1 salary i s equal to R$340, or about US$210.00). About 8.5% o f the population i s unemployed, which i s below the average found in metropolitan regions. Ha l f o f the heads o f households have fewer than five years o f schooling (first level incomplete). Health problems are severe and are associated with the population’s contact with contaminated water and untreated sewage, the

68

rising tides that cause the collapse o f these houses allow the entry o f animals, accidents that occur from falling in the water because o f the precariousness o f the floors o f these stilt houses and access to them, and exposure to frequent fires.

26. Legal framework supporting the resettlement solution: The proposed solutions for the resettlement o f the population living in st i l t houses and improvements to the slum area that will remain in place are supported by urban and environmental legislation. The main regulations that apply are: the Municipal Master Plan; the Statute o f Cities; Regulatory Instructions o f the Ministry o f Cities; the Housing Policy o f COHAB-Santos; the Drainage Master Plan; federal and state environmental laws. With respect to environmental legislation, it must be emphasized that CONAMA Resolution 369/06 allows for the urbanization o f slums along waterways. This authorization was provided following lengthy debates over slum solutions in Brazil, which are usually located along water bodies. The agreed solutions must include environmental recovery investments and are conditioned to situations o f extreme poverty.

27. Eligibility for resettlement: All fami l ies that inhabit homes located in areas that cannot be provided with.basic infrastructure because they are st i l t houses above water wi l l be eligible for resettlement. The information that identifies this situation i s the following: the cadastre completed in 2000, updated in 2004 and in 2006; socioeconomic research carried out subsequent to the cadastres; and engineering designs that define the urbanization solutions in the areas. These instruments clearly identify the houses and families that remain in the area and those that should be resettled. This information i s presented in the form o f a database that identifies the families and their socioeconomic characteristics. Moreover, geo-referenced maps link the families and housing on a scale that clearly identifies how each building i s constructed. This information wi l l be updated when the dates for initiating the urbanization work and resettlement are more definite. This wi l l be achieved when the detailed engineering designs are prepared and resources to initiate the works are made available. The occupation o f these areas, like many other slums in the country, changes rapidly because fami l ies leave, others arrive, and houses are expanded or disappear due to f i res or collapse. The final database will include detailed information required to support decisions, such as the degree o f neighborliness and friendship among the families, which wi l l aid in rebuilding the existing social network.

28. Assessment and compensation for losses: The houses where the families to be resettled reside are extremely precarious, built on water, with thin slabs o f wood, without sanitary facilities, and require frequent repairs in order to prevent collapses. These houses have a high cost for the families that build them but have a minimum value if they want to trade them. The families that are willing to live in these conditions have no income to pay for construction materials in only one installment. Because no financing mechanisms are available for this type o f housing, their opportunity cost i s extremely low. As a general rule, the market value i s less than the value o f replacement.

69

29. The alternatives offered for resettlement are: (i) 920 residential apartments located in a neighborhood known as Tancredo Neves, located about 3 k m s away f rom the area of removal, and (ii) 188 apartments to be built within the part o f the slum area that will receive infrastructure. The 920 apartments will be constructed in 28 buildings with 40 apartments each. The unit sizes vary from 45 to 49 m2, divided into kitchen, laundry, full bathroom, and two or three bedrooms. They are built four units per floor as five-story buildings without elevators and seven-story buildings with elevators. The entire housing unit comes with complete infrastructure, recreation areas, and environmental preservation areas. There is equipment for education and health services nearby, and additional equipment i s planned for the area’s estimated population growth The 188 apartments to be built within the urbanized slum will be provided with full infrastructure and urban services, and will have an average unit size o f 46m2.

(in minimum salary) Below 1 .O

30. Cost of resettlement housing: Beneficiaries will receive financial assistance for the resettlement houses, as presented below:

3 Negative interest rate, which includes a hidden subsidy:

(% annual) 20%

Income range Interest rate (in minimum salary) (% annual)

4-6

1.1-1.5 1.6-2.0 2.1-2.5

1 6-8 1 5 I

2 1 Yo 22% 23%

I Above 8 16 I Monthly family income committed to home mortgage:

2.6-3.0 3.1-4.0

I Income range I Interest rate I

24% 25%

~

4.1-5.0 Above 5.0

26% 1

3 0%

70

The average apartment cost i s US$23,100; Maximum monthly payment cannot exceed the percentage expressed in the table above. The necessary adjustments are made by extending the number o f mortgage years; Grace period: a grace period o f 6 months to 1 year i s given to beneficiaries based on their socioeconomic status; Unemployment: 3 months payment suspension (once every 12 months) i s conceded in the case o f declared unemployment; No formal employment documentation i s required.

3 1. Environmental assessment o f the resettlement area: The area where the resettlement units wi l l be built has been subject to an environmental assessment and an environmental license has already been provided. The area i s provided with full infrastructure and i s located within the city. The area belongs to COHAB, which has already built several housing units in the area. Space i s s t i l l available for additional buildings.

32. Consultations, grievance, governance, and participatory methodology: The population living in slums has been informed about the proposed urbanization and resettlement and has participated in designing the solutions through various mechanisms. These mechanisms can be grouped into the following categories: (i) similar nearby resettlement solutions provided to families previously living in slums; (ii) interviews during the cadastre process; (iii) meetings held with all the fami l ies and with specific groups o f families per section o f the slum during the preliminary design phase; (iv) the governance mechanisms in place in Santos, which require meetings by neighborhoods, scaling up to the level o f the city development council; and (v) COMUL (the Commission for Urban Development and Land Tenure Regularization), elected by the local community. O f the five members o f COMUL, two are from the local community. At meetings with COMUL, the slum upgrading projects are discussed and developed with the local communities. COMUL also controls infrastructure works and public government measures aimed at land regularization. These are also mechanisms that the community can use as a channel for voicing complaints and concerns. These concerns are addressed in subsequent meetings.

33. Detailed consultation and participation mechanisms: Additional intense consultations and participatory events wi l l be carried out during the preparation o f the engineering designs (including a broad range o f topics and sectors). The designs are carried out by a group o f professionals from various sectors, including sociologists, social workers, engineers, urban specialists, environmental specialists, architects, etc. This process usually takes about one year. During the working phase, consultation and participation are resumed, as well as after the works are concluded. The main events include:

0 preliminary contacts with the community; 0 identification o f local leaders;

meetings by sectors and the community at large; 0 establishment o f an office, located in a place easily accessible to the community, that will

provide information and receive complaints; meetings for the discussion o f diagnoses made by technicians in conjunction with the community; meetings and discussion o f aIternative solutions (urban planning, water, sewage, drainage, resettlement, land regularization);

71

0 meetings for the confirmation o f proposed solutions; 0 meetings with the population to be resettled to explain the mechanisms for receiving the

resettlement units (necessary documents, mechanisms for income confirmation, forms of financing); meetings with the public to be resettled to discuss rules for using common spaces, sharing condominium costs, etc.; and classes and events on environmental education.

0

0

34. Integration with the surrounding population: The Tancredo Neves housing complex already has several modules built and has been inhabited for several years. Many fami l ies living there have been removed from slums where urban services have been provided. Other families have applied to live there and received financing through COHAB. The quality and maintenance o f the existing buildings are adequate. The new buildings will not entail major changes in the neighborhood.

35, Institutional responsibilities for resettlement are undertaken by the Secretariat o f Government and COHAB-Santos. The Secretariat o f Government i s responsible for overall coordination o f the proposed project. COHAB-Santos i s the executing agency for planning, works, and operation o f slum urbanizations and resettlement o f the population. COHAB-Santos has been in operation since 1965, and i t s shareholders are the Municipalities o f Cubatgo, Santos, Guaruja, and Sgo Vicente. Until 1990, COHAB built housing units for low-income people with resources from the National Housing Bank (BNH). After BNH’s closure, COHAB continued to operate through other housing funds, including the budget o f the Municipality o f Santos. Since i ts creation, COHAB has built approximately 1 1,000 units in the four municipalities. The largest number o f units was built in the Municipality o f San Vicente in which urban area i s available. In the cities o f Santos, Guaruja, and Cubatgo these areas are almost nonexistent and the cost o f land i s very high.

36. Land acquisition: The land where the Tacredo Neves housing complex will be built already belongs to COHAB. The project wi l l require the acquisition o f an additional piece o f land for the construction o f the flood containment pond. This i s a private area located in a formal neighborhood and provided with all formal documentation. The area i s free o f occupation because it i s a naturally flooding pond. I t floods during each rainfall. The area will be purchased based on market value.

37. Resettlement costs: The costs o f resettlement are fully included in the budget o f the proposed project. The budget covers the cost o f constructing housing units, the cost o f social work to support families during the entire process, as well as monitoring and evaluation throughout the process, including after resettlement has occurred.

38. Monitoring and Evaluation wi l l be conducted on a continuous basis during the phases o f planning work, change o f location, and one year after the change o f location. The monitoring and evaluation methodology i s fairly comprehensive and has been tested in several actions o f a similar nature and with the same income profile o f the population. The costs o f these activities are included in the budget o f the proposed project.

72

Annex 11: Project Preparation and Supervision

BRAZIL: Municipality of Santos Project: Santos Novos Tempos

Planned Actual PCN review 04/30/07 Initial PID to PIC 0413 0107 Initial I S D S to PIC 04/30/07 Appraisal 11/26/08 Negotiations 0511 3/09 09/30/09 Boar d/RV P approv a1 Planned date o f effectiveness Planned date o f mid-term review Planned closing date Key institutions responsible for preparation o f the project: The Secretariat o f Government.

0811 9/09 1 01 14/09 10/30/12 0613 01 1 5

Bank staff and consultants who worked on the project included: Name Title Unit

Marta Elena Molares-Halberg Lead Counsel LEGLA Paula Dias Pini Senior Urban Specialist (TTL) LCSUW

Menahem Libhaber Lead Water Engineer LCSUW Jose Simas Lead W. Resources Engineer LCSUW Ming Zhang Senior Urban Specialist LCSUW Jose Barber0 Lead Transport Specialist LCSTR Maria Isabel Braga Senior Environmental Specialist LCSDE Natalie Gi anne 11 i Junior Professional Associate LCSUW Lucian0 Wuerzius Procurement Specialist LCSPT Miguel Santiago Oliveira Sr. Finance Officer LOAFC Nicolas Drossos E T Consultant/ Financial LCSFM

Gar0 Batmanian Peer Reviewer LCSEN Mi la Freire Peer Reviewer FEU Gerald Paul Ollivier Peer Reviewer ECSSD Jose Guilherme Reis Peer Reviewer LCSPF Tova Solo Peer Reviewer LCSUW Catherine Lynch Consultant LCSUW Julia Tierney Consultant LCSUW Perla Castillo Team Assistant LCSUW

Management

Bank funds expended to date on project preparation: 1. Bank resources: US$238,385.46 2. Trust funds: US$ 769,672.20 3. Total: US$ 1,008,057.6,

Estimated Approval and Supervision costs: 1, Estimated annual supervision cost:US90,000.00

73

Annex 12: Documents in the Project File BRAZIL: Municipality o f Santos Project: Santos Novos Tempos

0 Macro-drainage system feasibility studies

0 Project Environmental Assessment

0 Project Economic Analysis

0 Financial Management Capacity Assessment

0 Procurement Capacity Assessment

0

0

Santos Estuary Strategic Development Main Axis

Santos Estuary Consortium Legal and Institutional Assessment

0

0 Santos Fiscal Analysis

Santos - Marina Layout Alternatives

74

Annex 13: Statement o f Loans and Credits

BRAZIL: Municipality o f Santos Project: Santos Novos Tempos

Difference between expected and actual

disbursements Original Amount in US$ Millions

Proiect ID FY Puruose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd

PO99469 PI 01 508 PI 06663 PI 1 I996 PO06553 PO88716

PO99369 PI 04752 PO943 I 5 PI 06208 PI 10614 PI 07843 PI07146

PI06767 PI06765 PO95205 PO94 199 PO95626

PO89929 PO890 13 PO88966 P I06038 PO83997 PI 01 324

PO89793 PO8265 1 PO95460 PO890 1 1 PO50761 PO8 1436

PO82523 PO93787 PO92990 PO9004 1

PO89440 PO76924

2010 2010 2010 2010 2010 2009

2009 2009 2009 2009 2009 2009 2009

2009 2009 2009 2008 2008

2008 2008 2008 2008 2008 2008

2007 2007 2007 2007 2006 2006

2006 2006 2006 2006

2006 2005

BR (APL2) 2nd National Environmental BR-RJ Sustainable Rural Development BR Sao Paulo Feeder Roads Project BR RJ Mass Transit II BR SP APL Integrated Wtr Mgmt BR Health Network Formation & Quality lm BR Ceara Regional Development BR Paraiba 2nd Rural Pov Reduction BR Municipal APL4: Sa0 Luis BR Pemambuco Educ Results& Account. BR: Sergipe State Int. Proj.: Rural Pov BR Fed District Multisector Manag. Proj. BR Acre Social Economic Inclusion Sust D BR RGS Fiscal Sustainability DPL BR Ceara Inclusive Growth (SWAp II) BR 1st Prog. DPL for Sust. Env Mgmt BR-(APL) RS (Pelotas) Integr. Mun. Dev. BR (APL2)Family Health Extension 2nd APL BR RGN State Integrated Water Res Mgmt BR Municipal APL: Recife BR Municipal APL3: Teresina BR Sa0 Paulo Trains and Signalling BR Alto Solimoes Basic Services and Sust BR-Second Minas Gerais Dev't PArtnership BR State Pension Reform TAL II BR APL 1 Para Integrated Rural Dev BR-Bahia 1ntegr.Hway Mngmt. BR Municipal APLI: Uberaba BR-Housing Sector TAL BR-Bahia Poor Urban Areas Integrated Dev BR HD Technical Assistance Loan BR Bahia State Integ Proj Rur Pov BR - Road Transport Project BR ENVIRONMENTAL SUST. AGENDA TAL BR-Brasilia Environmentally Sustainable BR- Amapa Sustainable Communities

24.30 39.50

166.65 211.70 104.00 235.00

46.00 20.90 35.64

154.00 20.80

130.00 120.00

I ,I 00.00 240.00 1,300.00

54.38 83.45

35.90 32.76 31.13

550.00 24.25

976.00

5.00 60.00

100.00 17.27 4.00

49.30

8.00 84.35

501.25 8.00

57.64 4.80

75

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00 2.70 0.00

0.00 0.00 0.00 0.00

0.00 0.23

24.30 39.50

166.65 211.70 104.00 235.00

46.00 20.90 33.49

154.00 19.62

129.68 104.00

450.00 164.75

1,3 00.00 41.02 83.24

33.78 32.68 28.68

363.09 21.59

236.06

4.99 54.23 95.00 14.30 1.27

42.66

2.30 30.72

308.83 5.08

24.68 2.55

0.00 0.00 0.00 0.00 0.00 0.80

0.00 0.00

-1.97 0.00 2.37

10.96 -6.95

0.00 27.55

1.30 -8.70 15.40

17.97 9.73 1.13 8.27 2.38

- 120.50

2.75 43.23 19.20 9.08 3.72

42.66

2.30 -2.28

267.58 5.04

20.35 2.78

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

-0.51 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

PO83533 2005 PO69934 2005

PO87711 2005 PO87713 2004 PO83013 2004 PO60573 2004 PO49265 2003

PO74777 2003 PO76977 2003 PO66170 2002 PO60221 2002

PO51696 2002

PO50881 2001

PO50880 2001 PO06449 2000

PO38895 1998

BR TA-Sustain. & Equit Growth

EDUC QUAL IMPR BR Espirito Santo Wtr & Coastal Pollu BR Bolsa Familia 1st APL BR Disease Surveillance & Control APL 2 BR Tocantins Sustainable Regional Dev

PROJECT BR-Municipal Pension Reform TAL BR-Energy Sector TA Project BR-RGN Rural Poverty Reduction BR FORTALEZA METROPOLITAN TRANSPORT PROJ BR SA0 PAUL0 METRO LINE 4 PROJECT

REDUCTION BR Pernambuco Rural Poverty Reduction BR CEARA WTR MGT PROGERIRH SIM BR FED.WTR MGT

BR-PERNAMBUCO INTEG DEVT:

BR-RECIFE URBAN UPGRADING

BR BR-PlAUI RURAL POVERTY

12.12 31.50

107.50 572.20 99.50 60.00 46.00

5.00 12.12 45.00 85.00

304.00

45.00

60. I O 239.00

248.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00 4.36 0.00 0.00 0.00

1.30 0.00 0.00

62.60

0.00

0.00

0.63 0.00

8.15 9.88

71.50 8.67

20.36 21.91 10.55

0.44 7.10

20.60 12.18

61.56

5.30

6.70 103.00

63.00 9.82

8.15 9.88

0.00 13.03 20.86 21,91 10.55

1.74 7.10

-1.84 69.21

-33.20

-17.20

-22.67 0.00

22.95

0.00 0.00

14.00 0.00 0.00 0.00 0.00

0.00 0.00

18.41 17.49

61.80

5.30

1.83 0.00

-2.96

Total: 8,608.01 0.00 0.00 0.00 134.82 5,008.06 486.62 115.36

BRAZIL STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f US Dollars

Committed

IFC

Disbursed

I F C

FY Approval Company Loan Equity

ABN AMRO REAL 98.00 0.00 2005 2005 ABN AMRO REAL 98.00 0.00 2001 AG Concession 0.00 30.00 2002 Amaggi 17.14 0.00 2005 Amaggi 30.00 0.00 2002 Andrade G. SA 22.00 0.00 2001 Apolo 6.04 0.00 1998 Arteb 20.00 0.00 2006 B B M 49.40 0.00 2001 Brazil CGFund 0.00 19.75 2004 CGTF 54.01 0.00 1994 CHAPECO IO.00 0.00 1996 CHAPECO 1.50 0.00 2003 CPFL Energia 0.00 40.00 I996 CTBC Telecom 3.00 8.00

Quasi

0.00

0.00 0.00 0.00 0.00

10.00 0.00

0.00 0.00 0.00 7.00 0.00 0.00 0.00

0.00

Partic. Loan Equity Quasi Partic.

0.00 15.77 0.00 0.00

0.00 15.77 0.00 0.00 0.00 17.14 0.00 30.00

12.12 22.00 0.00 3.54

18.33 20.00 0.00 49.40 0.00 0.00

65.12 54.01 0.00 10.00 5.26 1.50 0.00 0.00 0.00 3.00

0.00 0.00 30.00 0.00 0.00 0.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 0.00 0.00 0.00

18.15 0.00 0.00 7.00 0.00 0.00 0.00 0.00

40.00 0.00 8.00 0.00

0.00

0.00 0.00 0.00 0.00

12.12 0.00

18.33 0.00 0.00

65.12 0.00 5.26 0.00 0.00

76

I997 I999 2004 2005

I997 2000 I980 I992

I998 I997 2005 1999 I998 2006 2006 2006 2000 1998 2006 2005

2001

I997 1998 1999 1980 1987 2006 2006 2000 2002 1999 2005 1992 2006 2002

2002 2005 1994 I994 2000 2002 2000

CTBC Telecom Cibrasec Comgas Cosan S.A Coteminas Coteminas Coteminas DENPASA DENPASA Dixie Toga

Dixie Toga Duratex EMBRAER Eliane Empesca Endesa Brasil Enerbrasil Ltda FEBR Fleury Fras-le

GOL GP Capital 111 GP Cptl Rstrctd GPC GTFP BIC Banco GTFP B M Brazil GTFP Indusval Guilman-Amorim Icatu Equity Innova SA Ipiranga Ipiranga Ipiranga

ltambe Itau-BBA Itau-BBA

JOSAPAR Lojas Americana MBR MRS Microinvest

Net Servicos Net Servicos Net Servicos Para Pigmentos Portobello Portobello Portobello Puras

0.00 0.00 1 1.90 50.00 0.00 1.85 0.00 0.00 0.00 0.00 0.00 1.36 35.00 14.93 1.33 0.00 0.00 12.00 0.00 4.00 50.00 0.00 0.00 0.00 44.91 4.22 5.00 18.08 0.00 0.00 0.00 0.00 50.00 15.00 12.86 70.61 7.57 35.00 0.00 50.00 0.00 0.00 0.00 0.00 2.15 0.00 4.28 0.00 0.00

6.54 3.27 0.00 5.00 I .84 1.25 0.18 0.52 0.06 0.34

10.03 0.00 0.00 0.00 0.00

50.00 5.50 0.00 0.00 0.00 0.00

14.00 2.22 0.00 0.00 0.00 0.00 0.00 5.46 5.00 2.87 0.54 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 1.25

10.93 1.60 5.08 0.00 0.59 0.00 0.90 0.00

0.00 0.00 0.00

15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.00 0.00

13.00 2.67 0.00 0.00 0.00 6.00 9.34 0.00 0.00 0.00 9.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.00 0.00

10.00 0.00 0.00 0.00 0.00 0.00 9.00 0.00 7.00 0.00 1 .oo

0.00 0.00

1 1.54 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.57

145.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

14.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

11.90 50.00 0.00 1.85 0.00 0.00 0.00 0.00 0.00 1.36

35.00 14.93

1.33 0.00 0.00

12.00 0.00 4.00 0.00 0.00 0.00 0.00

44.91 4.22 5.00

18.08 0.00 0.00 0.00 0.00 0.00 0.00

12.86 38.47 2.57

35.00 0.00 0.00 0.00 0.00 0.00 0.00 2.15 0.00 4.28 0.00 0.00

6.54 3.27 0.00 5.00 1.84 1.25 0.18 0.48 0.06 0.34

10.03 0.00 0.00 0.00 0.00

50.00 0.00 0.00 0.00 0.00 0.00 0.14 2.16 0.00 0.00 0.00 0.00 0.00 4.16 5.00 2.87 0.54 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.82

10.93 1.60 5.08 0.00 0.59 0.00 0.90 0.00

0.00 0.00 0.00

15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.00 0.00

13.00 2.67 0.00 0.00 0.00 6.00 6.04 0.00 0.00 0.00 9.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 7.00 0.00

10.00 0.00 0.00 0.00 0.00 0.00 9.00 0.00 7.00 0.00 1 .oo

0.00 0.00

11.54 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.57

145.00 0.00

0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

14.37 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

77

2003 2004 2006

1997 1997 1998 2000 2002 1999 2006 200 1 2006 1998 2004 200 1 2003 2004 2006 2002 2002

Queiroz Galvao Queiroz Galvao RBSec Randon Imp1 Part Sadia Samarco Saraiva Sepetiba Suape ICT Sudamerica Suzano petroq Synteko T A M Tecon Rio Grande Tecon Rio Grande Tecon Salvador Tecon Salvador TriBanco TriBanco UP Offshore Unibanco

26.67 0.00 0.60 0.00 22.83 1.51 2.33 0.00 2.55 0.00 3.60 0.00 0.00 1.24 26.24 0.00 6.00 0.00 0.00 7.35 50.00 0.00 11.57 0.00 50.00 0.00 3.55 0.00 7.87 0.00 2.95 1 .oo 0.00 0.55 10.00 0.00 0.35 0.00

9.01 9.5 1 16.89 0.00

10.00 0.00 0.00 3.00 2.33 0.00 0.00 5.00 0.00 0.00

10.00 0.00 0.00 5.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 3.28 0.00 0.00 0.00 0.00 0.00

140.00 0.00 0.00 3.71 7.76 3.10 0.00 0.00 0.00

23.29 0.00

26.67 0.08 0.00 2.33 2.55 3.60 0.00

11.24 6.00 0.00

39.50 11.57 17.00 3.55 7.59 2.95 0.00

10.00 0.35 0.00

16.89

0.00 0.00 1.51 0.00 0.00 0.00 1.24 0.00 0.00 7.35 0.00 0.00 0.00 0.00 0.00 0.77 0.55 0.00 0.00 2.5 1

0.00

10.00 0.00 0.00 3.00 2.33 0.00 0.00 5.00 0.00 0.00

10.00 0.00 0.00 5.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 3.28 0.00 0.00 0.00 0.00 0.00

110.50 0.00 0.00 3.71 7.48 3.10 0.00 0.00 0.00 0.00 0.00

Total portfolio: 1,164.15 253.88 144.84 503.45 703.91 223.86 141.54 400.38

FY Approval Company

Approvals Pending Commitment

Loan Equity Quasi Partic.

2000 BBA 0.01 0.00 0.00 0.00 1999 Cibrasec 0.00 0.00 D.00 0.00 2006 lpiranga 11 0.00 0.00 0.00 0.10 2002 Banco Itau-BBA 0.00 0.00 0.00 0.10

Total pending commitment: 0.01 0.00 0.00 0.20

78

Annex 14: Country at a Glance BRAZIL: Municipality of Santos Project: Santos Novos Tempos

79

Brazil at a glance 9/24/08

POVERTY and SOCIAL La t ln Upper-

Amer l ca mlddle- Braz l l & C a r i b . I n c o m e

1 0 0 7 Population, mid-year (millions) 1918 GNI per capita (Atlas method, US$) 5.9D

1,133.0 GNI (Atlas method. US$ billions)

Ave rage annual growth, 2 0 0 1 - 0 7

Population (46, 13

M o s t recen t est lmate ( latest year available, 2 0 0 1 - 0 7 )

Labor force (46, 18

Po verty (%of populatio n below natio nai po verty line) 22 Urban population (%of totalpopulation) 85 Life expectancyat birth (years) 72 Infant mortality (per iOOOl/ve births) 19 Child malnutrition (%of childrenunder5) 4 Access to an improvedwdtersource (%ofpopulation) 91

69 Gross primaryenrollment (%of school-age population) 137

Male 141 Female 133

Literacy (%of population age ?S+)

KEY ECONOMIC R A T I O S and LONG-TERM T R E N D S

1987 1887

GDP (US$ billions) 294.1 8712 Gross capital formation/GDP 22.3 n . 4 Exports of goods and services/GDP 9.5 6.6 Gross domestic savings/GDP 25.6 -6.2 Gross national SavingS/GDP 21.8 13.6

Current account balance/GDP -0.5 -3.5

Total debt/GDP 40.8 22.8 Total debt servicekxports 41.7 62.5 Present value of debtlGDP Present value o f debtlexports

1 9 8 7 - 9 7 1987-07 2 0 0 6 (average annual gro wth) GDP 1.9 2.8 3.7 GDP percapita 0.3 1.3 2.4 Exports Of goods and SeWiCeS 5.7 9.3 4.6

Interest paymentslGDP 2.1 12

563 623 5,540 6,987 3,118 5,750

13 0.7 2.1 1.3

7 8 75 73 71 22 22

91 95 90 93 118 111

P O 112 115 l09

5

2 0 0 8 2 0 0 7

1,067.8 1,314.2 15.8 22.1 14.7 t2.9 19.7 24.3 l i . 3 22.2

13 0.4 12

18.2 38.0 20.7

135.2

2 0 0 7 2 0 0 7 - 1 1

5.4 4.5 4.2 3.7 3.5 3.2

D e v e l o p m n t d i a m b

Life expectancy

GNI Gross per primary oapta enrollment

I

k c e s s t o improved watersoume

Economi c ra t i od

Tndr

Capital formation

Domestic $> savin Q s

Indebtedness

a73 E# -_ ._

- Upperl?tMdkinoorn group

STRUCTURE o f t h e E C O N O M Y 1987 1997

(%of GDP) Agriculture D O 5 4 Industry 45 Q 26 1

M anufactunng 32 0 167 Services 4 4 1 6 8 5

Household final consumption expenditure 6 2 3 6 4 9 General gov't final consumption expenditure 9 2 199 Imports of goods and Services 6 2 9 0

(average annualgrowth) Agriculture Industry

services Manufacturing

1887-97 1 8 9 7 - 0 7

2 1 4 2 0 9 2 3 3 2 2 4 3 1 3 7

Household final consumption expenditure 3 6 19 General gov't final consumption expenditure 0 8 2 5 Gross capital formation 18 2 1 Imports of goods and services 140 2 7

2 0 0 6 2 0 0 7

5.1 4.9 30.9 30.6 18.4 7 . 5

64.0 64.5

60.4 47.7 19.9 26.0 117 10.7

2 0 0 6 2 0 0 7

4.1 1.5 2.7 5.5 16 5.5 4.1 6.7

4.7 -2.9 3.6 2.2 8.7 40.7 18.1 13.2

Growth of capitd a r d GDP [%] m 10

m 0

-m

Note 2007 data are preiiminaryestimates This table was produced from the Development Economics LDB database *Thediamonds showfourkeyindicators in thecountry(in bold) comparedmth its income-groupaverage If dataaremissing thediamondmll

be incornnlete

80

Brazil

P R I C E S and G O V E R N M E N T F I N A N C E

D o m e s t i c p r i c e s (%change) Co nsumer prices Implicit GDP deflator

Governmen t f i nance (%of GDP, includes current grants) Current revenue Current budget balance Overall surplusideficit

T R A D E

(US$ millions) Totalexports (fob)

Iron ore, manganese Soybeans Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=WO) Import price index (20OO=WO) Terms of trade (2000=WO)

B A L A N C E o f P A Y M E N T S

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

M emo: Reserves including gold (US$ millions) Conversion rate (D iX , local/US$)

1987

228.3 204 1

324 -14

-2.8

1987

26,225 1,718

2,325 14,331 15,053

500 4,674 3,958

82 42 193

1987

28,073 7,749 32,324

-11699 -43

-1418

3.583 -2,135

7,458 143E-8

EXTERNAL D E B T and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

1987

119,842 IBRD 9,384 IDA 0

Total debt service 11957 iB RD 1555 IDA 0

Compositionof net resourceflows Official grants 35 Official creditors 36 Private creditors -705 Foreign direct investment (net inflows) 1159 Portfolio equity(net inflows) 61

Commitments 1394 Disbursements 915 P rincipai repayments 867 Net flows 48 Interest payments 888 Net transfers -641

W r l d Bank program

1997

5.2 7.7

7 . 1 0.1 2.4

1997

43,674 2,646 2,452

29,199 59,747 2,463 5,597

15,098

113 113

x)O

1997

59,870 77,269 -l7.399

-14,876 1823

-30,452

22,201 8,251

52,73 1.1

1997

198,457 5,743

0

41243 1,428

0

83 -1186 18,415 19,650 5,099

1 324 1415 1,049 368 380 -P

2006

6.9 4.3

2006

P7,305

79,904 96,835

49,003

io6 89

P O

2006

156,908 P0,243 36,665

-27,489 4,307

U,621

18,419 -32,040

85,839 2.2

2006

194,150 9,694

0

62,145 1,74

0

93 -401

6,197 18,782 7,715

1,557 2,203

743 1,460 432

1,028

2007

5.1 4.5

36.5 -3.2 -2.8

2007

148,324 11629 8,030

75,323 x)7,941

2,055 8,345 28,79

lx) 91 PI

2007

88.002 t39.394 28,608

-23,8P -135

4,661

78,199 -82,860

159,445 1.9

2007

9,676 0

1353 0

1365 606 805 -199 548

-747

Note:This table was produced from the Development Economics LDB database. 9/24/08

81

Annex 15: Map (IBRD 37337)

BRAZIL: Municipality of Santos Project: Santos Novos Tempos

82

Porto Alegre

Rio deJaneiro

São Paulo

Vitória

Salvador

Maceió

Recife

João Pessoa

Fortaleza

São LuísBelém

Porto Velho

Cuiabá

Belo Horizonte

Goiânia

Teresina

Palma

Florianópolis

Curitiba

Aracaju

Natal

Macapá

Boa Vista

Manaus

Rio Branco

CampoGrande

M A T OG R O S S O

TOCANTINS B A H I A

M I N A S G E R A I S

F.D.

GOIÁS

MATO GROSSODO SUL

SÃO PAULO

ESPÍRITOSANTO

RIO DEJANEIRO

PARANÁ

STA CATARINA

RIO GRANDEDO SUL

A M A Z O N A S

RONDÔNIA

PA R Á

RORAIMAAMAPÁ

MARANHÃO CEARÁ

P I A U Í

RIO GRANDEDO NORTE

PARAÍBA

ALAGOAS

SERGIPE

PERNAMBUCOACRE

BRASÍLIA

C O L O M B I A

P E R U

B O L I V I A

PARAGUAY

URUGUAY

ARGENT INA

CHILE

GUYANA

SURINAME

FrenchGuiana

(Fr.)

R.B. DEVENEZUELA

Porto Alegre

Rio deJaneiro

São Paulo

Vitória

Salvador

Maceió

Recife

João Pessoa

Fortaleza

São LuísBelém

Porto Velho

Cuiabá

Belo Horizonte

Goiânia

Teresina

Palma

Florianópolis

Curitiba

Aracaju

Natal

Macapá

Boa Vista

Manaus

Rio Branco

CampoGrande

Santos

BRASÍLIA

M A T OG R O S S O

TOCANTINS B A H I A

M I N A S G E R A I S

F.D.

GOIÁS

MATO GROSSODO SUL

SÃO PAULO

ESPÍRITOSANTO

RIO DEJANEIRO

PARANÁ

STA CATARINA

RIO GRANDEDO SUL

A M A Z O N A S

RONDÔNIA

PA R Á

RORAIMAAMAPÁ

MARANHÃO CEARÁ

P I A U Í

RIO GRANDEDO NORTE

PARAÍBA

ALAGOAS

SERGIPE

PERNAMBUCOACRE

C O L O M B I A

P E R U

B O L I V I A

PARAGUAY

URUGUAY

ARGENT INA

CHILE

GUYANA

SURINAME

FrenchGuiana

(Fr.)

R.B. DEVENEZUELA

Amazon

Amazon

O

r inoco

Negro

Purus

Madeir

a

Teles Pires

Jur

uena

Xin

gu

Arag

uaia

Toca

ntin

s

São

Fran

cisco

Para

ná

Grande Paraguay

Tapajó

s

ATLANTIC

OCEAN

ATLANTIC

OCEAN

PACIFIC

OCEAN

To Ciudad Guayana

To Santa Cruz

To Santa Cruz

To BuenosAires

To Montevideo

70°W 60°W 50°W 40°W

70°W 60°W 50°W 40°W

20°S

30°S

0°

10°S

20°S

30°S

0°

BRAZIL

Th is map was produced by the Map Des ign Uni t o f The Wor ld Bank. The boundar ies , co lo rs , denominat ions and any other in format ionshown on th is map do not imply, on the par t o f The Wor ld BankGroup, any judgment on the lega l s tatus of any te r r i to ry , o r anyendorsement or acceptance of such boundar ies .

0 200 400

0 200 400 Miles

600 Kilometers

IBRD 37337

NO

VEM

BER 2009

BRAZIL

PROJECT CITY

STATE CAPITALS

NATIONAL CAPITAL

MAIN ROADS

RAILROADS

STATE BOUNDARIES

INTERNATIONAL BOUNDARIES